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Impact of earnings management on value‐relevance of accounting information: empirical evidence from Japan

Ahsan Habib (Department of Accounting and Information Systems, Faculty of Business Studies, University of Dhaka, Dhaka‐1000, Bangladesh)

Managerial Finance

ISSN: 0307-4358

Article publication date: 1 November 2004

Abstract

This paper investigates the impact of earnings management on value relevance of accounting information in the context of Japan. Researchers carrying out earnings management research usually rely on the Jones (1991) or the modified Jones model (1995) to disaggregate accruals into its discretionary and non‐discretionary components. However, because of criticisms leveled against extant models of discretionary accruals, this study instead uses earnings management measures constructed by Leuz et al. (2001) and Bhattacharya et al. (2001) and examines the relationship between these measures and their impact on the value‐relevance of accounting information. The latter is operationalized by the explanatory power of book values and earnings (combined model) and earnings alone (earnings model) for stock price. Results based on 5,318 consolidated firm‐year observations over 1992‐1999 show that, both earnings management measures and aggregate earnings management measures (combination of both earnings smoothing and earnings management measures) are significantly negatively associated with the combined value relevance of book values of equity and earnings (combined model) and value relevance of earnings (earnings model).

Keywords

Citation

Habib, A. (2004), "Impact of earnings management on value‐relevance of accounting information: empirical evidence from Japan", Managerial Finance, Vol. 30 No. 11, pp. 1-15. https://doi.org/10.1108/03074350410769344

Publisher

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Emerald Group Publishing Limited

Copyright © 2004, Emerald Group Publishing Limited