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Managers' Incentives, Earnings Management Strategies, and Investor Sentiment

Author

Listed:
  • Zhonghai Yang

    (Accounting School, Harbin University of Commerce, China)

  • Roger Su

    (Lecturer of Accounting, Auckland University of Technology, New Zealand)

  • Qianqian Zhang

    (Accounting School, Harbin University of Commerce, China)

  • Ying Sun

    (Accounting School, Harbin University of Commerce, China)

Abstract

The impact of managers' incentives and earnings management methods on investor sentiment, based on 9581 listed firms in China from 2006 to 2011, is studied. This paper examines the influence of managers' incentives and earnings management methods on investor sentiment and intends to study how managers' incentives influence real earnings management (REM) and earnings management methods, and following on how REM and earnings management methods influence investor sentiment. The empirical results indicate that managers use REM to manipulate the earnings in order to be able to declare a profit, avoid loss, refinance, and change executives. The listed companies with higher executive compensations prefer to use accrual earnings management (AEM). However, making larger profits by using REM activities is not a universal phenomenon in China because the capital market in China is not efficient. This paper also finds that, when a company makes larger profits using REM activities, investors are optimistic. When a company uses AEM activities to increase earnings, investors readily recognize AEM and they become pessimistic.

Suggested Citation

  • Zhonghai Yang & Roger Su & Qianqian Zhang & Ying Sun, 2014. "Managers' Incentives, Earnings Management Strategies, and Investor Sentiment," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 13(2), pages 157-180, December.
    • Handle: RePEc:ijb:journl:v:13:y:2014:i:2:p:157-180
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    References listed on IDEAS

    as
    1. Katherine A. Gunny, 2010. "The Relation Between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks," Contemporary Accounting Research, John Wiley & Sons, vol. 27(3), pages 855-888, September.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    3. Swaminathan, Bhaskaran, 1996. "Time-Varying Expected Small Firm Returns and Closed-End Fund Discounts," The Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 845-887.
    4. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
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    Cited by:

    1. Persakis, Antonios & Iatridis, George Emmanuel, 2023. "How economic uncertainty influences the performance of investor perceptions and behavior," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 51(C).

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    More about this item

    Keywords

    real earnings management (REM); accrual earnings management (AEM); management incentives; investor sentiment;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

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