There's No Smoke Without Fire: Does the Context of Earnings Management Contain Information About Future Stock Returns?

47 Pages Posted: 16 Jun 2015

See all articles by Nguyet Nguyen

Nguyet Nguyen

University of Kent - Canterbury Campus

Abdullah Iqbal

University of Kent, Canterbury

Radha K. Shiwakoti

University of Kent - Canterbury Business School

Date Written: March 26, 2015

Abstract

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

Nguyen, Nguyet and Iqbal, Abdullah and Shiwakoti, Radha K., There's No Smoke Without Fire: Does the Context of Earnings Management Contain Information About Future Stock Returns? (March 26, 2015). Available at SSRN: https://ssrn.com/abstract=2618776 or http://dx.doi.org/10.2139/ssrn.2618776

Nguyet Nguyen (Contact Author)

University of Kent - Canterbury Campus ( email )

Keynes College
Canterbury, Kent CT2 7NP
United Kingdom

Abdullah Iqbal

University of Kent, Canterbury ( email )

Canterbury, Kent CT2 7PE
United Kingdom

Radha K. Shiwakoti

University of Kent - Canterbury Business School ( email )

Canterbury, Kent CT2 7NZ
United Kingdom

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