Topic:The Bright Side of Earnings Management
Speaker:Renhui Fu, Shanghai Jiao Tong University
Time:Wednesday, Nov 14th, 10:00-11:30 a.m
Place:Room 217, Guanghua Building 2
Theory depicts situations in which capital market frictions trap managers into managing earnings. This paper probes one such situation and demonstrates the usefulness of earnings management in correcting stock underpricing. We find that underpricing, measured using mutual fund fire sales, positively relates to the likelihood of a firm marginally beating the analyst consensus forecast. Firms beat earnings goals by cutting R&D as well as making income-increasing reporting choices. They increasingly lean on R&D reduction after the Sarbanes-Oxley Act of 2002 or if an industry peer firm recently announced a fraud-related restatement. While both types of manipulation help accelerate price reversal after fire sales, firms cutting R&D underperform those using accruals in the long-run. We use the 2003 mutual fund trading scandal as a shock to fund outflows to further identify causal effects. Overall, these results suggest that allowing managers reporting discretion can be optimal in certain situations to avoid real consequences.
Dr. Renhui Fu joined Shanghai Jiao Tong University in 2014. He received his master degree in Enterprise Management from Xiamen University and Ph.D. in Accounting from Nanyang Technolugical University. He has published inJournal of Accounting and Economics, Chinese Journal of Management Science, European Accounting Review and Journal of Corporate Finance and so on.
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