The effect of investor sentiment on the means of earnings management

  • Received August 18, 2017;
    Accepted December 6, 2017;
    Published January 3, 2018
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  • Article Info
    Volume 15 2018, Issue #1, pp. 10-17
  • Cited by
    4 articles

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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

Prior research has shown that a firm’s tendency to meet or beat earning targets is greater during bad economic times than good times. The paper extends this line of research by investigating which means of earnings management is used in different states of economy. A sample of non-financial companies listed on Korea Securities Market from 2003 to 2011 is used for empirical tests. The findings of this study are summarized as follows. The magnitude of discretionary accruals is negatively related to investment sentiment, indicating that firms tend to use positive discretionary accruals to manipulate reported income upward when the sentiment is pessimistic. However, the real activity based earnings management is not significantly associated with the state of economy. Collectively, this study contributes to behavioral finance and accounting literature by suggesting that managers use discretionary portion of accruals, but do not change their real operating activities, in order to meet or beat earnings targets in economic downturn.

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    • Table 1. Sample firms’ industry composition
    • Table 2. Descriptive statistics
    • Table 3. Investor sentiment and discretionary accruals
    • Table 4. Investor sentiment and real-based earnings management