Sentiment, Earnings Co-Movements and Earnings Manipulation
July 12, 2013 Leave a comment
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.
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