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Web End = Rev Quant Finan Acc (2015) 45:561590 DOI 10.1007/s11156-014-0447-3
ORIGINAL RESEARCH
Ashok Robin Qiang Wu
Published online: 16 March 2014 Springer Science+Business Media New York 2014
Abstract This paper examines how rm growth conditions the pricing of discretionary accruals. Given the rich growth opportunities and high information asymmetry in high-growth rms, we expect that managers have incentives to use discretionary accruals, especially income increasing (positive) discretionary accruals, to signal favorable private information to external investors. Our empirical tests reveal that overall there is no signicant difference in the pricing of discretionary accruals between high-growth and low-growth rms. However, consistent with our expectations, we nd that in high-growth rms compared to low-growth rms, positive discretionary accruals are priced to a greater extent, while negative discretionary accruals are priced to a smaller extent. Additional tests show that positive discretionary accruals have a relatively greater association with future rm performance in high-growth rms. Finally, we nd that the pricing of positive discretionary accruals in high-growth rms is predominantly in those rms with high levels of information asymmetry.
Keywords Discretionary accruals Firm growth Valuation
Capital markets Information asymmetry Signaling
JEL Classication M41 G14 G32
1 Introduction
The role of discretionary accruals in market valuation and contracting continues to attract considerable interest in the accounting literature. Although most studies of discretionary
A. Robin
Saunders College of Business, Rochester Institute of Technology, Rochester, NY 14623, USA e-mail: [email protected]
Q. Wu (&)
Lally School of Management, Rensselaer Polytechnic Institute, Troy, NY 12180, USA e-mail: [email protected]
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Web End = Firm growth and the pricing of discretionary accruals
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accruals focus on their negative role1 (opportunistic earnings management), some focus on their positive effect (performance signaling). In light of the many ways in which managers use discretionary accruals, Guay et al. (1996) suggest that researchers take managers incentives into account when selecting samples to identify and study the role of discretionary accruals. However, few studies directly examine scenarios where managers have strong incentives to signal their private information to outside investors.2 In this paper, we contribute by...