Are Discretionary Accruals a Signal for a Bright Future? : Evidence from an Information Search Demand and Supply Matrix

Purpose – Two competing hypotheses explain the motivation of using discretionary accruals: managerial opportunism and managerial optimism. To the extent of the managerial optimism hypothesis, the purpose of this study is to examine whether managers use discretionary accruals to disseminate private information when the information demand of stakeholders is high and the information supply is low. Design/Methodology/Approach – The final sample consists of 2,855 KSE firm-years listed on Korea Stock Exchange (KSE) from 2007 to 2013. All dependent and independent variables are winsorized at the top and bottom 1 percent. Multiple regression analysis were used to test the hypotheses. Findings – The study found managers tend to use more discretionary accruals when the information demand is high and the information supply is low, and the discretionary accruals contain favorable signals about future performance. Research Implications or Originality – First, the study provides evidence for the managerial optimism hypothesis of the earnings management literature. Second, it provides a framework for information demand and supply dynamics with a new type of data. Despite several limitations, this study sheds new light on the discretionary accruals and the information demand/supply literature in the field of Internet Searches, Accounting, and Financial Economics