This study examines whether the informativeness of earnings and the pricing of discretionary accruals by the market are associated with investment opportunity set (IOS) and debt levels. We show that the earnings-returns relationship is impacted positively by IOS but negatively by debt after controlling for other confounding variables such as size, beta, persistence of earnings and regulatory environment. We then show that the market prices discretionary accruals at a higher level for high-IOS firms than for low-IOS firms. The evidence on the effect of debt on the pricing of discretionary accruals is weaker but negative. We show further that the positive association of discretionary accruals with future profits is further improved in high-IOS firms but weakened in high-debt firms. This is consistent with the view that managers use discretionary accruals as a means to signal future opportunities for growth. In effect, this efficient earnings management can be significant, especially in high-IOS firms. More interestingly, opportunistic earnings management is not the only motivation for earnings management under all circumstances. Key Words: Earnings management; Investment opportunity set; Capital markets; Valuation; Discretionary accruals