International Journal of Business and Economics Volume 13, No. 2 December, 2014

Managers' Incentives, Earnings Management Strategies, and Investor Sentiment

Zhonghai Yang

Accounting School, Harbin University of Commerce, China

Roger Su

Lecturer of Accounting , Auckland University of Technology , New Zealand

Qianqian Zhang

Accounting School, Harbin University of Commerce , China

Ying Sun

Accounting School, Harbin University of Commerce , China

Abstract

The impact of managers' incentives and earnings management methods on investor sentiment, based on 9581 listed firms in China from 2006 to 2011, is studied. This paper examines the influence of managers' incentives and earnings management methods on investor sentiment and intends to study how managers' incentives influence real earnings management ( REM) and earnings management methods, and following on how REM and earnings management methods influence investor sentiment. The empirical results indicate that managers use REM to manipulate the earnings in order to be able to declare a profit, avoid loss, refinance, and change executives. The listed companies with higher executive compensations prefer to use a ccrual earnings management ( AEM). However , making larger profits by using REM activities is not a universal phenomenon in China because the capital market in China is not efficient. This paper also finds that, when a company makes larger profits using REM activities, investors are optimistic. When a company uses AEM activities to increase earnings , investors readily recognize AEM and they become pessimistic.

Keywords： real earnings management (REM), a ccrual earnings management (AEM), management incentives, investor sentiment.

JEL Classifications：F3, G1.

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