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Macareana

This document discusses examining whether investors understand the earnings implications of resource management (RM) and earnings management. The evidence is mixed as to whether investors recognize earnings management through accruals. To understand this further, the document examines the extent to which investors incorporate the future earnings implications of RM into stock prices. It also discusses the efficient market hypothesis and investor fixation hypothesis in the context of efficient pricing and potential mispricing of accounting information by investors when understanding and using information for price formation.

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Nivesh Lallbahadoor
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71 views1 page

Macareana

This document discusses examining whether investors understand the earnings implications of resource management (RM) and earnings management. The evidence is mixed as to whether investors recognize earnings management through accruals. To understand this further, the document examines the extent to which investors incorporate the future earnings implications of RM into stock prices. It also discusses the efficient market hypothesis and investor fixation hypothesis in the context of efficient pricing and potential mispricing of accounting information by investors when understanding and using information for price formation.

Uploaded by

Nivesh Lallbahadoor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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+Next, I examine the behavior of investors, in an effort to assess whether

investors
understand the earnings implications of RM. The evidence as to whether
investors recognize
earnings management (specifically accruals) is mixed. On the one hand,
investors seem to not
fully see through earnings management as reflected in abnormal accruals
(Sloan, 1996; Xie,
2001). On the other hand, in the banking and insurance industries, loan
and policy loss reserves are two major accounts subject to management
discretion and investors do understand the information in these accruals
(Wahlen, 1994; Beaver and Engel, 1996; Liu et al., 1997; Beaver and
McNichols, 2001). To ascertain whether investors detect and, therefore,
react to RM, I examine the extent to investors incorporate the future
earnings implications of RM into stock prices.

+Efficient pricing means the accounting information is appropriately


understood and used in market price formation. Mispricing occurs when
the accounting information is misunderstood and inappropriately used in
price formation. This is the view followed in the extant earnings
management literature (e.g.,Subramanyam, 1996; Sloan, 1996; Xie,
2001).
I consider the motivation of REM based on either the efficient contracting
hypothesis or the managerial opportunism hypothesis, and under two
competing market efficiency hypotheses: the efficient market hypothesis
(EMH) and the investor fixation hypothesis.

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