Henock Louis Louis
Pennsylvania State University
Dahlia M. Robinson
Arizona State University
Abstract: We examine the contention that managers use discretionary accruals to disclose their private information to the market. Prior studies strongly suggest that managers use stock splits to signal their optimism to investors. Hence, we conjecture that if managers use abnormal accruals to communicate their beliefs to the market, they are most likely to do so around stock splits. We then examine whether managers use accruals as a signaling device in conjunction with stock splits and whether the market efficiently re-prices the abnormal accruals at the split announcement. We find that managers report significantly positive discretionary accruals in the quarter prior to stock split announcements. The evidence also shows that the market positively revalues the discretionary accruals at the stock split announcements. This result is consistent with the market perceiving the discretionary accruals as a signal of managementÂ’s optimism rather than the result of opportunistic behavior. Finally, we find no evidence that the abnormal accruals are correlated with the splittersÂ’ long-term performance, which suggests that the market fully adjusts for the signal conveyed by the pre-split discretionary accruals at the split announcements.
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