The information content of discretionary accruals during systemic crises

Abstract

Purpose By analyzing the relationship between discretionary accruals and information asymmetry throughout the latest global financial crisis, this paper deepens our understanding of the effect of managerial discretion on the informativeness of earnings in the case of a negative exogenous shock in business fundamentals. Design/methodology/approach This paper examines the relationship between discretionary accruals and the bid–ask spread within the Italian Stock Exchange over the period of 2007–2012. The authors focus on one country in order to avoid systematic cross-country performance variation in discretionary accruals models, and they use the bid–ask spread as a proxy for information asymmetry. Findings This paper shows the role played by discretionary accruals in unblocking private information in the case of a negative exogenous shock in business fundamentals and finds a significant negative relationship between discretionary accruals and the bid–ask spread during the global financial crisis, although only limited to firms with strong corporate governance. Research limitations/implications Since the paper focuses on one country, the findings might not be necessarily generalizable. Moreover, the relatively small sample size could be another limitation. Practical implications This paper offers useful evidence to identify settings in which discretionary accruals increase the informativeness of earnings. Further, it suggests controlling for macroeconomic variables to mitigate the risk of an erroneous interpretation of discretionary accruals models. Originality/value This paper extends knowledge and collects new evidence on the information content of discretionary accruals by investigating the relationship between discretionary accruals and information asymmetry during a systemic crisis.

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