Sentiment, Earnings Co-Movements and Earnings Manipulation

Sentiment, Earnings Co-Movements and Earnings Manipulation

Andrew B. Jackson University of New South Wales (UNSW) – School of Accounting

Brian Rountree Rice University – Jesse H. Jones Graduate School of Business

June 11, 2013

Abstract: 
This paper provides an empirical validation of the theoretical model in Strobl [2013]. Our results are consistent with the model, which document the greater co-movement of earnings with the market the less likely a firm is to manipulate earnings. Furthermore, we find evidence that the probability of manipulation and the importance of earnings co-movements in determining that probability increase as the state of the economy improves. This means earnings management is more prevalent during expansions relative to recessions. Additionally, we provide evidence that firms which are more sensitive to market sentiment are more likely to have managed earnings with a stronger effect during the best economic times. Overall, our results are helpful in understanding the time varying nature of earnings management.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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