Earnings management practices among growth and value firms

Abstract

This research examines the earnings management practices of growth versus value firms. We predict that growth firms have more incentive to 'manage their earnings' and that they do so more aggressively as compared to value firms. The primary reason for this behaviour is that information asymmetries are more severe for growth firms. Using a sample of firms over the period from 1997 through 2001, this study finds that growth firms tend to manage their earnings upward and downward more aggressively than value firms. These results are robust to using different components of discretionary total accruals as a measure for earnings management and after controlling for other factors.

Highly Valued Equity and Real Operation Management: Long-Term 'Detoxification'

“…Sawicki and Shrestha (2008) compare abnormal accruals across different quintiles of firms ranked by book-to-market ratio, and document no clear pattern suggesting that the level of accruals management is related to mispricing. Madhogarhia et al (2009) find that growth firms manage earnings, in both directions, more aggressively than value firms, due to the more severe asymmetric information. Houmes and Skantz (2010) argue that managers may not necessarily always be aware whether their firms are overpriced or not.…”

An Investigation of The Income Smoothing Behavior of Growth and Value Firms (Case Study: Tehran Stock Exchange Market)

“…The second influential factor identified by Madhogarhia et al (2009) is the extent of the analyst coverage. They maintain that growth firms will suffer much more than value firms with regard to earnings disappointments and negative EPS in a firm'.…”

“…Hence, there will be larger incentives for growth firms' than for value firms' managers to apply income smoothing actions. Madhogarhia et al (2009) also looked at institutional ownership because it reduces a mananger's ability to make abnormal accruals (Mitra, 2002, p.65). They also considered managerial ownership in the belief that higher levels of managerial ownership would cause lower levels of abnormal accruals and might have a substantial effect on growth firms when associated with higher levels of accruals (Warfield et al 1995, p.26).…”

“…Madhogarhia et al (2009) have identified the following influencing factors which differentiate growth firms from value firms.…”

“…Following Madhogarhia et al (2009), the T test was executed to compare the means of the growth firms and value firms. We will explain more about this later.…”