Work

Does Earnings Management Affect Firms’ Investment Decisions?

Year: 2008

Type: article

Abstract: ABSTRACT: This paper examines whether firms manipulating their reported financial results make suboptimal investment decisions. We examine fixed asset investments for a large sample of public companies during the 1978–2002 period and document that firms that manipulate their earnings—firms investigated by the SEC for accounting irregularities, firms sued by their shareholders for improper accounting, and firms that restated financial statements—over-invest substantially during the misreporting period. Furthermore, following the misreporting period, these firms no longer over-invest, consistent with corrected information leading to more efficient investment levels. We find similar patterns for firms with high discretionary revenues or accruals. Our findings suggest that earnings management, which is largely viewed as targeting parties external to the firm, can also influence internal decisions.

Source: The Accounting Review

DOI: 10.2308/accr.2008.83.6.1571

Authors: Maureen F. McNichols, Stephen R. Stubben

Institutions: Stanford University, University of North Carolina at Chapel Hill

Language: English

Topic: Auditing, Earnings Management, Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2016808053

FWCI: 38.06

Cites: 43

Cited by: 963

Related to: 10