Abstract
This paper examines the implications of investor expectations for the joint determination of earnings manipulation and asset prices. Three alternative models of investor expectations are studied: constant-gain learning, regime-shifting beliefs, and accounting-information-system (AIS) beliefs. I use the simulated method of moments (SMM) to estimate the most plausible model that matches the actual data. AIS beliefs and regime-shifting beliefs are shown to best explain the empirical moments of 63% and 32% of S&P 500 firms, respectively. Regression analysis suggests that the three models offer different predictions on the existence and magnitude of several empirical regularities including a positive earnings response coefficient, the discretionary accruals anomaly, and return momentum.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
