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Peer performance and earnings management

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  • Du, Qianqian
  • Shen, Rui

Abstract

This paper studies how peer performance affects firms’ earnings management decisions. Using peer firms’ idiosyncratic returns as an exogenous peer performance measure and the instrumental variable approach, we find that higher peer performance leads to higher discretionary accruals. This effect is salient for both industry leaders and followers and is robust to alternative discretionary accrual measures and alternative peer definitions. We examine two mechanisms through which peer performance affects firms’ earnings management. We find that analysts revise their earnings forecasts according to peer performance and that when peer performance is higher, firms are less likely to meet or beat analyst consensus without managing earnings. This evidence suggests a capital market pressure mechanism. In addition, the effect of peer performance is more pronounced in firms using relative performance evaluation, suggesting a compensation pressure mechanism. In sum, our evidence suggests that managers report opportunistically to match peer performance.

Suggested Citation

  • Du, Qianqian & Shen, Rui, 2018. "Peer performance and earnings management," Journal of Banking & Finance, Elsevier, vol. 89(C), pages 125-137.
    • Handle: RePEc:eee:jbfina:v:89:y:2018:i:c:p:125-137
    DOI: 10.1016/j.jbankfin.2018.01.017
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    Cited by:

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    2. Do, Hung X. & Nguyen, Lily & Nguyen, Nhut H. & Nguyen, Quan M.P., 2022. "LGBT policy, investor trading behavior, and return comovement," Journal of Economic Behavior & Organization, Elsevier, vol. 196(C), pages 457-483.
    3. Jose Joy Thoppan & Robert Jeyakumar Nathan & Vijay Victor, 2021. "Impact of Improved Corporate Governance and Regulations on Earnings Management Practices—Analysis of 7 Industries from the Indian National Stock Exchange," JRFM, MDPI, vol. 14(10), pages 1-15, September.
    4. SHEN, Yu & SHE, Kaiwen, 2024. "Loan origination and risk underpricing: The role of lending incentives," Finance Research Letters, Elsevier, vol. 62(PB).
    5. Du, Qianqian & Liang, Dawei & Chen, Zilin & Tu, Jun, 2022. "Concept links and return momentum," Journal of Banking & Finance, Elsevier, vol. 134(C).
    6. Fu, Zheng & Ma, Yechi & Li, Suyang & Qiao, Lu, 2023. "Peer performance and the asymmetric timeliness of earnings recognition," International Review of Financial Analysis, Elsevier, vol. 85(C).
    7. May Huaxi Zhang & Stanley Iat-Meng Ko & Andreas Karathanasopoulos & Chia Chun Lo, 2022. "A two-step quantile regression method for discretionary accounting," Review of Quantitative Finance and Accounting, Springer, vol. 59(1), pages 1-22, July.
    8. Adnan Shoaib & Muhammad A. Siddiqui, 2022. "Earning information content changes based on accrual measures and quality measures: Evidences from member countries of Asia Pacific trade agreement," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 1526-1546, January.
    9. Bruno Figlioli & Fabiano Guasti Lima, 2020. "Investment Cash Flow Sensitivity and Tobin’s Q: The Case of Advanced Emerging Markets in Latin America," International Business Research, Canadian Center of Science and Education, vol. 13(1), pages 89-108, January.
    10. Machokoto, Michael & Chipeta, Chimwemwe & Ibeji, Ngozi, 2021. "The institutional determinants of peer effects on corporate cash holdings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 73(C).
    11. Zhu, Qi & Jin, Sisi & Huang, Yuxuan & Yan, Cheng & Chen, Chuanglian, 2022. "Oil price uncertainty and stock price informativeness: Evidence from investment-price sensitivity in China," International Review of Financial Analysis, Elsevier, vol. 84(C).

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    More about this item

    Keywords

    Peer performance; Earnings management; Capital market pressure; Relative performance evaluation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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