Premium
Overvalued equity, benchmark beating and unexpected accruals
Author(s) -
Coulton Jeffrey J.,
Saune Naibuka,
Taylor Stephen L.
Publication year - 2015
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12077
Subject(s) - accrual , incentive , benchmark (surveying) , equity (law) , earnings , earnings management , business , economics , econometrics , accounting , monetary economics , microeconomics , geodesy , political science , law , geography
We investigate the extent to which the overvaluation hypothesis provides incentives for managers to beat earnings benchmarks, and whether this benchmark beating can be reliably interpreted as evidence of earnings management. We carefully identify firms immediately above earnings benchmarks that have a priori, overvaluation‐based incentives to achieve the benchmark. We therefore focus on benchmark‐beating observations where manipulation is most likely, providing a more powerful test of the existence of opportunistic financial reporting. Consistent with overvaluation‐related incentives encouraging earnings management, we find that overvalued firms that just exceed levels‐related earnings benchmarks have higher unexpected accruals than firms with less extreme valuations.