There's No Smoke Without Fire: Does the Context of Earnings Management Contain Information About Future Stock Returns?
47 Pages Posted: 16 Jun 2015
Date Written: March 26, 2015
This paper constructs a signal-based composite index, namely ESCORE, which captures the context of earnings management. Specifically, ESCORE aggregates 15 individual signals related to earnings management based on prior relevant literature. Empirical results using UK data shows that when ESCORE is higher, firms do manage earnings with greater magnitude and are more likely to be most aggressive, both in accruals and real earnings management. The study also finds that low ESCORE firms outperform those with high ESCORE by 1.37% per month after controlling for risk loadings on the market, size, book-to-market and momentum factors up to one year after portfolio formation.
Keywords: Earnings management, market anomaly, stock returns predictability, earnings management detection models
JEL Classification: M41, G14
Suggested Citation: Suggested Citation