Aggregate Discretionary Accruals and Future Market Returns

• In Event: Earnings Management

Abstract

We conduct a cross-country analysis to provide further insight into the “lean against the wind” hypothesis of aggregate discretionary accruals. Kang et al. (2010) document a positive association between aggregate discretionary accruals and future stock returns and propose “leaning against the wind”, i.e., opportunistic earnings management in times of economic downturn, as a potential explanation. To gain a deeper understanding of this phenomenon, we examine several economic factors that might explain the result. We find that the “lean against the wind” phenomenon is not pervasive across countries and that the association between aggregate discretionary accruals and future market returns is less (more) positive in countries with more stringent disclosure requirements (greater analyst activity). These results suggest that aggregate discretionary accruals contain less (more) garbling component in countries with stronger disclosure requirements (countries where analysts exert greater pressure to managers to meet earnings targets). Collectively, our results are consistent with the “lean against the wind” hypothesis and highlights the monitoring role of mandatory disclosure requirements.

Authors

• Kriengkrai Boonlert-U-Thai, Chulalongkorn University

• Sam Han, Korea University Business School

• Tony Kang, McMaster University

• Eunyoung Lee, Korea University