Real earnings management and cost of capital

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)518-543
Journal / PublicationJournal of Accounting and Public Policy
Volume32
Issue number6
Online published3 Sep 2013
Publication statusPublished - Nov 2013

Abstract

This study investigates whether a firm's cost of equity capital is influenced by the extent of a firm's real activities management. Using a large sample of U.S. firms, we find that our proxy for the cost of capital is positively associated with the extent of earnings management through the real activities manipulation after controlling for the effect of the accrual-based earnings management. We also provide evidence suggesting that this positive association stems from managerial opportunism rather than from the measurement errors in our real earnings management proxies. The main findings are robust to a battery of sensitivity tests. Collectively, our results suggest that real earnings management activities exacerbate the information quality of earnings used by outside investors, and thus the market demands a higher risk premium for these activities, which is incremental to the risk premium for the accrual-based earnings management. © 2013 Elsevier Inc.

Citation Format(s)

Real earnings management and cost of capital. / Kim, Jeong-Bon; Sohn, Byungcherl Charlie.

In: Journal of Accounting and Public Policy, Vol. 32, No. 6, 11.2013, p. 518-543.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review