Articlegreen2013

Earnings Manipulation and Expected Returns

Messod Daniel Beneish · Charles M.C. Lee · D. Craig Nichols

157 citations0/0 files storedFinancial Analysts Journal

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Corporate Governance and Financial Management

Abstract

An accounting-based earnings manipulation detection model has strong out-of-sample power to predict cross-sectional returns. Companies with a higher probability of manipulation (M-score) earn lower returns on every decile portfolio sorted by size, book-to-market, momentum, accruals, and short interest. The predictive power of M-score stems from its ability to forecast changes in accruals and is most pronounced among low-accrual (ostensibly “high-earnings-quality”) stocks. These findings support the investment value of careful fundamental and forensic analyses of public companies.

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References

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