Are Unmanaged Earnings Always Better for Shareholders?

Arya, Anil; Sunder, Shyam; Glover, Jonathan

doi:10.2139/ssrn.322260

Cited by 56 publications

(86 citation statements)

References 6 publications

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“…We also examine the cross‐sectional variation in our results. We find that the richness of the information environment has a mitigating effect on the strength of the association between managerial discretion in accruals and informational efficiency; this result is consistent with managers’ reduced need of using accruals to convey information in richer information environments (Arya et al., ; and Louis and Robinson, ). Furthermore, we identify a sub‐sample of restated financial statements in which the primary reason for restatement is related to accrual accounting; in this setting, a greater use of discretion in accrual reporting presumably makes accounting numbers less informative for market participants.…”

Section: Introductionsupporting

confidence: 79%

“…Previous literature suggests that managers of firms in richer information environments have less need to use discretion in accounting numbers to communicate their private information (Arya et al., ; and Louis and Robinson, ). To test whether the information environment of a firm affects our findings on the association between informational efficiency and discretionary accruals, we use three proxies for the richness of the information environment: firm size ( SIZE ), the number of analysts following ( NAF ; Louis and Robinson, ), and institutional ownership ( INST ; Boehmer and Kelley, ).…”

Section: Multiple Regression Analysismentioning

confidence: 99%

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Managerial Discretion in Accruals and Informational Efficiency

Perotti

Windisch²

2017

Business Fin & Account

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In this paper, we examine the relation between managerial discretion in accruals and informational efficiency. We measure managerial discretion in accruals by the absolute value of abnormal accruals. Assuming that efficient prices follow a random walk, we measure informational efficiency by using stock return variance ratios. We find that the absolute value of abnormal accruals is negatively associated with the price deviation from a random walk pattern, estimated in the 12‐month period subsequent to the accrual reporting; hence, future informational efficiency increases with the extent to which managers exercise discretion over accruals. The results are consistent with the view that discretionary accruals, on average, convey useful information to investors and facilitate the price convergence to its fundamental value. Our findings are robust to a battery of tests, including tests to validate both our measures of informational efficiency and our measure of managerial discretion in accruals.

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Section: Introductionsupporting

confidence: 79%

Section: Multiple Regression Analysismentioning

confidence: 99%

Managerial Discretion in Accruals and Informational Efficiency

Perotti

Windisch²

2017

Business Fin & Account

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“…Prior academic research has not reached a theoretical or empirical consensus on whether earnings that are smoother than cash flows provide or, rather, garble information. For example, Arya, Glover, and Sunder [2003] argue that by smoothing earnings, managers remove the transient portion of earnings and communicate the permanent portion, thereby enabling equity markets to arrive at an efficient estimate of the firm's stock price. Chaney and Lewis [1995] argue that income smoothing plays an informational role, as it is high‐valued, rather than low‐valued, firms that smooth income.…”

Section: Hypothesis Developmentmentioning

confidence: 99%

Earnings Volatility, Cash Flow Volatility, and Informed Trading

Jayaraman

2008

J of Accounting Research

155

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I examine whether earnings that are smoother or more volatile than cash flows provide or garble information. Consistent with theories that predict more informed trading when public information is less informative, I find that bid-ask spreads and the probability of informed trading are higher both when earnings are smoother than cash flows and also when earnings are more volatile than cash flows. Additional tests suggest that managers' discretionary choices that lead to smoother or more volatile earnings than cash flows garble information, on average. However, I find that informed trading is attenuated in settings in which theory suggests that discretionary smoothing or volatizing of earnings is likely to be informative.

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“…The answers to these questions provide a basis for predicting the effects of requiring more transparent comprehensive income reporting standards (e.g., FASB 2005), and developing a more complete theory of earnings management and disclosure policy. 1 See Arya et al (2003) for a discussion of potential costs that can result from transparency improvement. 2 In a survey of 111 randomly selected firms from the Russell 2000 Index, Mazza and Porco (2004) find that 83 percent report comprehensive income in a statement of stockholders' equity, 3 percent use the one-statement approach, and 14 percent use the two-statement approach.…”

Section: Introductionmentioning

confidence: 99%

Financial Reporting Transparency and Earnings Management (Retracted)

Hunton

Libby

Mazza

2006

The Accounting Review

173

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Prior research indicates that greater transparency in reporting formats facilitates the detection of earnings management. The current study hypothesizes and demonstrates that greater transparency in comprehensive income reporting also reduces the likelihood that managers will engage in earnings management in the area of increased transparency. In our experiment, 62 financial executives and chief executive officers decide which available-for-sale security to sell from a portfolio. We manipulate the transparency of comprehensive income reporting and the relationship of projected earnings to the consensus forecast in a 2 ϫ 2 between-subjects design. When projected earnings are below (above) the consensus forecast, participants sell securities that increase (decrease) earnings. However, the rarely used, more transparent format for reporting comprehensive income significantly reduces both income-increasing and income-decreasing earnings management. Participants in the less transparent setting indicate that earnings management attempts will not be obvious to readers, will improve stock prices, and have no effect on management's reputation for reporting integrity. Conversely, respondents in the more transparent condition suggest that earnings management will be obvious to readers, harmful to stock prices, and damaging to reporting reputation. Results of this study suggest that more transparent reporting requirements will reduce earnings management in the area of increased transparency or change the focus of earnings management to less visible methods.

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Are Unmanaged Earnings Always Better for Shareholders?

Cited by 56 publications

References 6 publications

Managerial Discretion in Accruals and Informational Efficiency

Managerial Discretion in Accruals and Informational Efficiency

Earnings Volatility, Cash Flow Volatility, and Informed Trading

Financial Reporting Transparency and Earnings Management (Retracted)

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