Underinvestment and value relevance of earnings management
The aim of this study is to examine whether earnings management among underinvestment firms is positively related to share price. Firms are said to have high growth opportunity but is unable to fund investment projects due to liquidity constraints because of the information asymmetry between the f...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
| Published: |
Penerbit Universiti Kebangsaan Malaysia
2016
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| Online Access: | http://journalarticle.ukm.my/10801/ http://journalarticle.ukm.my/10801/ http://journalarticle.ukm.my/10801/1/9290-43009-1-PB.pdf |
| Summary: | The aim of this study is to examine whether earnings management among underinvestment firms is positively related to
share price. Firms are said to have high growth opportunity but is unable to fund investment projects due to liquidity
constraints because of the information asymmetry between the firm and the investors. As a result, firms have to provide
high quality accounting information (i.e. value relevant information) to reduce information asymmetry and hence
be free from liquidity constraints. One type of accounting information that can be provided is discretionary accrual
(proxy for earnings management). The sample of this study is firms listed on the Main Board of Bursa Malaysia from
year 2001 to 2007. We use Ohlson’s model to examine the value relevance of earnings management. We separate
earnings into managed and unmanaged earnings. Panel data regression analyses were performed to examine the
role of underinvestment on the relationship between earnings management and share price. We also examine the
value relevance of earnings management using the return model. The results from the panel data regression analysis
indicate that earnings management increases the value relevance of accounting information. Further, underinvestment
moderates the relationship between earnings management and share price. Nevertheless, the results suggest that
earnings management among firms can decrease the value relevance of accounting information. In general, it is
concluded that underinvestment weakens the relationship between earnings management and share price/return, hence
it motivates managers to convey opportunistic earnings management. |
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