Earnings Management and the Post-earnings Announcement Drift

Authors


  • This paper benefits from comments by an anonymous referee, Walid Al-Issa, Sung Chung, John Core, Paul Fischer, Dan Givoly, Zhaoyang Gu, Chris Jones, Bin Ke, Adam Koch, Joan Lee, Andrew Leone, Russell Lundholm, James McKeown, Jeffrey Ng, Scott Richardson, Lakshmanan Shivakumar, Oktay Urcan, Hal White, and workshop participants at Carnegie Mellon University, the London Business School, the third Penn State Summer Research Conference, the 2007 AAA Annual Conference, the Securities and Exchange Commission, and the 2007 Norfolk Southern Excellence in Accounting Conference at the College of William and Mary for helpful comments on an earlier draft. We are particularly grateful to Steven Huddart for an extensive discussion of the research idea and to an anonymous referee for some very constructive comments.

Abstract

We posit that the post-earnings announcement drift (PEAD) is related to earnings management. Accordingly, we find that firms with large negative (positive) changes in operating cash flows manage accruals upward (downward). Most importantly, we find that PEAD is concentrated largely among those firms that are most likely to have smoothed their reported earnings and is generally associated with discretionary accruals as opposed to nondiscretionary accruals. There is no evidence of a positive (negative) PEAD for those firms with large positive (negative) earnings changes that are least likely to have managed earnings downward (upward).

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