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Market Cycles Effect on Financial Reporting
Alireza Daneshfar,
University of New Haven
ABSTRACT. This study examines the association between stock prices and discretionary accruals in different stock market cycles. The study presents evidence for a discrepancy in prior research and shows that investors are able to identify earnings management only in some cases. We argue that investors’ reaction to the true nature of EPS varies in different market cycles. We suggests that investors pay less attention to the nature of EPS changes in an optimistic cycles, and are more critical in neutral or pessimistic cycles. Therefore, investors are more likely to detect and count for any earnings management in the neutral or pessimistic cycle than in the optimistic cycle. The test results indicated that the association between discretionary accruals and abnormal stock returns were insignificant in the neutral market cycle, significant and positive in the optimistic cycle and significant and negative in the pessimistic cycle.
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