Overvaluation and earnings management: Does the degree of overvaluation matters?

Article


Duong, C. and Pescetto, Gioia 2018. Overvaluation and earnings management: Does the degree of overvaluation matters? Accounting and Business Research. 49 (2), pp. 121-146.
AuthorsDuong, C. and Pescetto, Gioia
Abstract

We examine whether the choice of earnings management strategies employed by managers of overvalued firms depends on the degree of market overvaluation. By distinguishing between substantially overvalued and relatively overvalued firms, we find that substantially overvalued firms significantly inflate earnings using both accruals-based and real earnings management. In contrast, managers of relatively overvalued firms do not engage in accruals-based earnings management and their firms’ accounts tend to report higher discretionary expenses. The reported higher discretionary expenses of relatively overvalued firms are comparable to the discretionary expenses of firms in the expanding stage of their business life cycle, a pattern consistent with relatively overvalued firms increasing discretionary expenses to finance growth and hence justify the high market valuation. Overall, we show that the existing evidence on income-increasing earnings management by overvalued firms is mainly driven by the pressure to sustain the high market valuation of firms that are substantially overvalued.

JournalAccounting and Business Research
Journal citation49 (2), pp. 121-146
ISSN0001-4788
Year2018
PublisherTaylor & Francis
Accepted author manuscript
License
Digital Object Identifier (DOI)doi:10.1080/00014788.2018.1451737
Web address (URL)https://doi.org/10.1080/00014788.2018.1451737
Publication dates
Online02 Apr 2018
Publication process dates
Deposited13 Feb 2018
Accepted09 Feb 2018
Accepted09 Feb 2018
Copyright informationThis is an Accepted Manuscript of an article published by Taylor & Francis in Accounting and Business Research on 02.04.18, available online: http://www.tandfonline.com/10.1080/00014788.2018.1451737
LicenseAll rights reserved (under embargo)
Permalink -

https://repository.uel.ac.uk/item/8487w

  • 16
    total views
  • 8
    total downloads
  • 4
    views this month
  • 5
    downloads this month

Related outputs

Accounting conservatism and banking expertise on board of directors
Nguyen, T. T., Duong, C., Nguyen, N. T. M. and Bui, H. Q. 2019. Accounting conservatism and banking expertise on board of directors. Review of Quantitative Finance and Accounting.
What Make the Impact of the Financial Crisis on Innovation Different Across European Countries?
Nguyen, Nguyet Thi Minh and Duong, C. 2019. What Make the Impact of the Financial Crisis on Innovation Different Across European Countries? International Journal of Innovation and Technology Management. 16 (Art. 1950041).