Investor expectations, earnings management, and asset prices

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

This paper examines the implications of investor expectations for the joint determination of earnings manipulation and asset prices. Three alternative models of investor expectations are studied: constant-gain learning, regime-shifting beliefs, and accounting-information-system (AIS) beliefs. I use the simulated method of moments (SMM) to estimate the most plausible model that matches the actual data. AIS beliefs and regime-shifting beliefs are shown to best explain the empirical moments of 63% and 32% of S&P 500 firms, respectively. Regression analysis suggests that the three models offer different predictions on the existence and magnitude of several empirical regularities including a positive earnings response coefficient, the discretionary accruals anomaly, and return momentum.

Original languageEnglish (US)
Pages (from-to)134-157
Number of pages24
JournalJournal of Economic Dynamics and Control
Volume105
DOIs
StatePublished - Aug 2019

Fingerprint

Information systems
Information Systems
Method of moments
Regression analysis
Method of Moments
Momentum
Regression Analysis
Anomaly
Manipulation
Regularity
Model
Moment
Beliefs
Earnings management
Asset prices
Investors
Prediction
Alternatives
Coefficient
Estimate

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

Cite this

@article{9dcf8d10017442f99c7dd65ee2d608c2,
title = "Investor expectations, earnings management, and asset prices",
abstract = "This paper examines the implications of investor expectations for the joint determination of earnings manipulation and asset prices. Three alternative models of investor expectations are studied: constant-gain learning, regime-shifting beliefs, and accounting-information-system (AIS) beliefs. I use the simulated method of moments (SMM) to estimate the most plausible model that matches the actual data. AIS beliefs and regime-shifting beliefs are shown to best explain the empirical moments of 63{\%} and 32{\%} of S&P 500 firms, respectively. Regression analysis suggests that the three models offer different predictions on the existence and magnitude of several empirical regularities including a positive earnings response coefficient, the discretionary accruals anomaly, and return momentum.",
author = "Kai Du",
year = "2019",
month = "8",
doi = "10.1016/j.jedc.2019.06.002",
language = "English (US)",
volume = "105",
pages = "134--157",
journal = "Journal of Economic Dynamics and Control",
issn = "0165-1889",
publisher = "Elsevier",

}

Investor expectations, earnings management, and asset prices. / Du, Kai.

In: Journal of Economic Dynamics and Control, Vol. 105, 08.2019, p. 134-157.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Investor expectations, earnings management, and asset prices

AU - Du, Kai

PY - 2019/8

Y1 - 2019/8

N2 - This paper examines the implications of investor expectations for the joint determination of earnings manipulation and asset prices. Three alternative models of investor expectations are studied: constant-gain learning, regime-shifting beliefs, and accounting-information-system (AIS) beliefs. I use the simulated method of moments (SMM) to estimate the most plausible model that matches the actual data. AIS beliefs and regime-shifting beliefs are shown to best explain the empirical moments of 63% and 32% of S&P 500 firms, respectively. Regression analysis suggests that the three models offer different predictions on the existence and magnitude of several empirical regularities including a positive earnings response coefficient, the discretionary accruals anomaly, and return momentum.

AB - This paper examines the implications of investor expectations for the joint determination of earnings manipulation and asset prices. Three alternative models of investor expectations are studied: constant-gain learning, regime-shifting beliefs, and accounting-information-system (AIS) beliefs. I use the simulated method of moments (SMM) to estimate the most plausible model that matches the actual data. AIS beliefs and regime-shifting beliefs are shown to best explain the empirical moments of 63% and 32% of S&P 500 firms, respectively. Regression analysis suggests that the three models offer different predictions on the existence and magnitude of several empirical regularities including a positive earnings response coefficient, the discretionary accruals anomaly, and return momentum.

UR - http://www.scopus.com/inward/record.url?scp=85068082138&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85068082138&partnerID=8YFLogxK

U2 - 10.1016/j.jedc.2019.06.002

DO - 10.1016/j.jedc.2019.06.002

M3 - Article

AN - SCOPUS:85068082138

VL - 105

SP - 134

EP - 157

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

ER -