“Market valuation and Earnings Manipulation” by Shing-yang HU
This paper examines a popular belief that managers of high valuation companies have a stronger incentive to manipulate future earnings than low valuation companies. Using U.S. data from 1988 to 2004 as our sample, we find the belief only half true. A positive relationship between valuation and future discretionary accruals only exists for companies receiving limited attention. For companies included in the Standard & Poor’s 1500 index, there is no such a relationship. As for the motivation of manipulation, the evidence suggests that it is used to increase the proceeds received from seasoned equity offerings; it is not used to facilitate executives to sell their personal stocks. Also, we do not find any evidence to support the claim that high valuation companies with a stronger equity-based compensation will manipulate more. On the contrary, there is weak evidence that high valuation companies with good governance will be less aggressive in using accruals.