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Study On The Effects Of Investor Sentiment On Corporate Earnings Management Behavior

Posted on:2016-12-21Degree:DoctorType:Dissertation
Country:ChinaCandidate:P LuFull Text:PDF
GTID:1109330464959632Subject:Accounting
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Traditional financial theory is based on full rational investors, independent cognitive deviation and arbitrage. It points out that stock prices reflect all the publicly available information.Investors can not obtain excess returns according to public information, because the stock price is always equal to the discounted future cash flow. However, more and more empirical evidence shows that the stock market is not efficient as described by the efficient market hypothesis, many capital market anomalies can be difficult to explain by the traditional financial theory framework. When traditional financial theory gets into trouble, more and more scholars turn to behavioral finance. Behavioral finance is based on bounded rational individuals, limited arbitrage and inefficient market, and takes the psychological concepts into the analysis of the finance. Behavioral finance points out that investor sentiment can lead to share price deviation from its intrinsic value in the long term because of the sentiment infection between investors and limited arbitrage. Following the analysis framework of behavioral finance, many scholars have proved the managers strategically cope with the stock mispricing caused by investor sentiment in financing, investment and disclosure behaviors. As Baker (2007) notes, however, about how managers through the earnings management decision making strategic response to investor sentiment still lacks empirical evidence.Under the above background, this paper is based on the analysis framework of behavioral finance, takes the listed companies in Shanghai and Shenzhen stock markets as the research objects, constructs a composite index of China’s stock market investor sentiment,and tries to make answers to the following questions. Firstly, Whether or not significant does investor sentiment impact the market response of the earnings announcement? If significant, What degree does it reach? How long does it last?Secondly, Whether company managers strategically choose the timing of the earnings management according to the market investor sentiment? Whether managers manipulating earnings strategically choose the time of earnings disclosure in the different period of market sentiment? If the answer is yes, what is the mechanism?It falls into seven chapters. Chapter one is the introduction that present the background and significance, formulate research thought, framework, technique route and innovation.Chapter two is the literature review.First, this chapter review the literature on the investor sentiment and earnings management. Then basing on the review of relevant literature about the impacts of investor sentiment on the earnings management, this chapter comes up with the breakthrough point and the logic thinking.Chapter third illustrates the impact mechanism of investor sentiment on the ompany’s earnings management behavior. Firstly, this chapter analyzes the influence of investor sentiment on the market reaction of earnings announcements. Then, this chapter points out the mechanism that managers strategically choose the timing and time of earnings management according to the influence of investor sentiment on the earnings response coefficient. Finally, this chapter puts forward the analysis framework of the influence of investor sentiment on the company earnings management behavior.Chapter four chooses the six sentiment source indexes of closed-end fund discount, stock turnover, financing amount of IPO, the first day return of IPO, consumer confidence index and the stock market new accounts, constructs the investor sentiment index of the Chinese capital markets by the principal component analysis.Chaper five examines the total effect, cross-sectional effect and time window effect of investor sentiment influencing the stock market response to earnings news empirically using the investor sentiment index constructed by Chapter four, taking the earnings announcements of the listed companies in Shanghai and Shenzhen stock markets as a sample.Chapter six firstly examines whether managers choose the time of earnings management strategically on the basis of investor sentiment. Then studies whether managers choose the time of earnings disclosure strategically during the different market sentiment periods. Lastly, this chapter further loose the assumption of rational managers, analyzes the intermediate effect of manager optimism in the impacts of investor sentiment on the behavior of corporate earnings management from the perspective of manager non-rationlity.Chapter seven is the conclusion. On the basis of the previous chapters, this chapter generalizes and summerizes the main findings, and points out the shortcomings and future research direction.The main conclusions are as follows:Fristly, investor sentiment has the significant impacts on the stock market response to earnings news. (1)The test results of the total effect suggest that the stock market response to the positive unexpected earnings increases with the rise of investor sentiment, and to the negative unexpected earnings declines with the rise of investor sentiment, in other words the earnings response coefficient of the good news is higher during periods of high sentiment, and the earnings response coefficient of the bad news is higher during periods of low sentiment. (2) The test results of the cross-sectional effect suggest that the impacts of investor sentiment upon the stock market response to earnings news differ significantly between small and large corporate groups, young and old corporate groups, low and high tangible assets ratio corporate groups, high and low price-earnings ratio corporate groups, the impacts of investor sentiment on the positive(negtive) market response to good(bad) earnings news of the former is larger than the latter significantly. (3) The test results of the time window effect suggest that the upward stock price drift following the announcement of good earnings news is greater during periods of high sentiment, and the downward stock price drift following the announcement of bad earnings news is greater during periods of low sentiment. Furthermore, the impacts of investor sentiment upon the stock market response to earnings news decrease with the window extension.Secondly, the research of earnings response coefficient on the behavior of corporate earnings management suggest:(1) The discretional accruals of corporate earnings are positively correlated to the earnings response coefficient. For the corporate announcing good earnings news, the higher investor sentiment is, the stronger the relationship is between the two; For the corporate announcing bad earnings news, the lower investor sentiment is, the stronger the relationship is between the two. (2) The positive correlation between the discretional accruals of corporate earnings and the earnings response coefficient is stronger for the former than the latter between small and large corporate groups, young and old corporate groups, low and high tangible assets ratio corporate groups, high and low price-earnings ratio corporate groups. (3) As the earnings response coefficient increases, the behavior that managers report good earnings news early and bad earnings news lately has been strengthened. (4) In the impacts of investor sentiment on the behavior of corporate earnings management, at least part of the role is contributed by the intermediate effect of manager optimism.In this paper, the innovation points are as follows:Firstly, this paper chooses individual sentiment index and remove the effect of macroeconomic factors, using the principal component analysis to construct the investor sentiment index of the Chinese capital markets.Secondly, this paper analyzes the impacts of investor sentiment on the market response to earnings news in accordance with the cognitive tunning theory and risk preference theory, and determines the earnings response coefficient containing investor sentiment factor on the basis of quantifying the above-mentioned effect. Results show that managers manage earnings strategically in accordance with the earnings response coefficient during the different sentiment periods, revealing the mechanism of investor sentiment influencing the behavior of corporate earnings management.Thirdly, this paper comes up with the theoretical hypothesis of corporate earnings management, and examines whether managers manage earnings strategically on the basis of investor sentiment which supplements and enriches the literature of investor sentiment influencing the behavior of corporate earnings management.Fourthly, this paper studies whether managers choose the time of earnings disclosure strategically during the different market sentiment periods on the basis of managers managing earnings strategically in accordance with investor sentiment. Furthermore, this paper further loose the assumption of rational managers, analyzes the intermediate effect of manager optimism in the impacts of investor sentiment on the behavior of corporate earnings management from the perspective of manager non-rationlity, so that incorporates the boundedly rational investor and manager into the same framework and analyzes the impacts of investor sentiment and manager optimism upon the behavior of corporate earnings management comprehensively.
Keywords/Search Tags:Investor sentiment, Market response of earnings announcements, Earnings management
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