Investor expectations, earnings management, and asset prices

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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.

Original languageEnglish (US)
Pages (from-to)134-157
Number of pages24
JournalJournal of Economic Dynamics and Control
StatePublished - Aug 2019

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics


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