Do market participants value earnings management? An analysis using the quantile regression method

Abstract

Purpose

The purpose of this paper is to postulate that market participants’ views on the nature of discretionary accruals as earnings management or earnings manipulation could relate to a rise or a fall in a firm’s stock prices.

Design/methodology/approach

Applying the quantile regression and measuring gains and losses according to the stock returns, this study shows that the relation between earnings manipulation and stock returns is non-uniform and it varies significantly across various quantiles of the latter.

Findings

The empirical results imply a positive (negative) |DA|-RETURN relation for stocks experiencing a rise (fall) in stock prices. This finding is consistent with the notion that market participants lean towards (become) trend followers (fundamentalists) when their stocks price rise (fall) and, thus, positively reward (negatively punish) discretionary accruals.

Originality/value

Using the behavioural heterogeneity of market participants as a research framework, this paper contributes to the literature by demonstrating that market participants’ decisions to positively reward (negatively punish) earning management behaviour depend on their perceptions on nature of discretionary accruals (earnings management vs earnings manipulation).

Citation

Li, L. and Hwang, N.-C.R. (2019), "Do market participants value earnings management? An analysis using the quantile regression method", Managerial Finance, Vol. 45 No. 1, pp. 103-123. https://doi.org/10.1108/MF-02-2018-0087