The Analysis Of Earnings Management Affecting Investment Decisions

This paper examines whether earnings management affects resource allocation by studying whether firms manipulating earnings make suboptimal investment decisions. We aim to provide evidence on whether accounting misstatements cause distortions in the investment decisions made within firms engaging in the misstatement. A large literature in accounting examines earnings management by public companies. Many studies in this literature examine whether, how, and why firms manage earnings. To date, however, this literature has provided relatively limited evidence concerning the consequences of earnings management. Our study contributes to this literature by documenting that earnings management can affect decisions within firms.Investment decisions depend on expectations of the benefits of the investment, which in turn depend on expectations of future growth and product demand. Expectations of future growth are based on information that includes revenues and earnings. In addition to merely concealing the actual performance during the period, misstated financial results can mask underlying trends in revenue and earnings growth. Thus, overstatements of revenues and earnings are likely to distort expectations of growth by investment decisions makers. It is possible that investment decision makers within the firm believe the misreported growth trend, because they are either over-optimistic or unaware of the misstatement. Alternatively, investment decision makers might understand the true state of the firm but choose to over-invest in a high-risk approach to cover up the past earnings management.Our first hypothesis is that firms overstating financial results invest more than they otherwise would have had they reported truthfully; the misstatement of financial results affects investment decisions. Because the earnings manipulations in our samples are largely income-increasing, we hypothesize that the overstatement of financial results leads to over-investment. Our second hypothesis examines the years after the manipulation period to provide supporting evidence that the over-investment in prior years was due to earnings manipulation. If firms over-invest during the manipulation period due to the distortion of information, then we expect firms to stop over-investing once the reported information is no longer distorted.This paper is composed of five chapters.Chapter one is an introduction which illustrates there search background, meanings, the structure of this paper, and research methods.Chapter two is a summation on relevant research. This part reviews the literature on the relationship of earnings management and resource allocation, earnings management and investment decisions, earnings quality and investment decisions.Chapter three is the theory analysis. This part explains the concept of earnings management and investment decisions, the fundamental theory of earnings management and the relationship of earnings management and investment decisions.Chapter four is the empirical examine. This part, first proposes three hypothesizes according to the theory analysis. Second, my study discusses measures of earnings management and excess investment and design empirical procedures. Finally, the section shows the empirical results.Chapter five is the conclusion, suggestion and the future research of this study.My research conclusion is:1. Earnings management can affect firms'investment decisions.2. Firms manipulating earnings will have greater investment levels than expected based on the value of their investment opportunities during the period earnings are manipulated.3. Firms that manipulate earnings will not invest at greater levels than expected given their investment opportunities in the post-manipulation period.4. Firms with low levels of external financing would restrict investment actively in the first year after the misreporting period.5. Firms with low levels of Tobin Q would restrict excess investment in the misreporting period. 6. Discretionary accruals' of investment is stronger than the operating cash flow.Our study contributes to the literature relating earnings management and investment decisions. More, this paper use several measures to prove hypothesizes.