Overvaluation and earnings management: Does the degree of overvaluation matters?
Article
Duong, C. and Pescetto, G. 2018. Overvaluation and earnings management: Does the degree of overvaluation matters? Accounting and Business Research. 49 (2), pp. 121-146. https://doi.org/10.1080/00014788.2018.1451737
Authors | Duong, C. and Pescetto, G. |
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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. |
Journal | Accounting and Business Research |
Journal citation | 49 (2), pp. 121-146 |
ISSN | 0001-4788 |
Year | 2018 |
Publisher | Taylor & Francis |
Accepted author manuscript | License File Access Level Anyone |
Digital Object Identifier (DOI) | https://doi.org/10.1080/00014788.2018.1451737 |
Publication dates | |
Online | 02 Apr 2018 |
Publication process dates | |
Accepted | 09 Feb 2018 |
Deposited | 13 Feb 2018 |
Copyright holder | © 2018 The Authors. This 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 |
https://repository.uel.ac.uk/item/8487w
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Accepted author manuscript
Overvaluation_ABR_clean_ROAR.pdf | ||
License: All rights reserved | ||
File access level: Anyone |
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