The Valuation Of Discretionary Accruals And Antitrust Merger Investigations

Abstract

This study explores the impact of managerial discretion on the information content of reported earnings.  In particular, we extend the prior research by examining the pricing of discretionary accruals for firms subject to antitrust merger investigation.  To date, the empirical evidence on managerial discretion and earnings informativeness has been limited, and the pricing of discretionary accruals in the earnings management context of antitrust merger investigations has not been examined.  We address this gap in the literature, and provide results that are consistent with our expectations. Specifically, the evidence indicates that investigated firms’ discretionary accruals are priced by the stock market, and that such earnings components have incremental information content regarding future profitability.  In contrast, as expected, the accruals of non-investigated firms are not value-relevant.