Do value and growth firms differ in their earnings management practices?
This research examines earnings management practices of growth vis-à-vis value firms. It proposes that growth firms have more of an incentive to 'manage their earnings' and that they do so more aggressively as compared to value firms. A major reason for this behavior is that information asymmetries are much higher for growth firms. This study finds that, on an average, based on the absolute values of discretionary negative total accruals during the period 1997 through 2001, growth firms manage their earnings downward more aggressively than do value firms. In addition, based on the absolute values of discretionary negative current accruals, growth firms manage their earnings downward more aggressively than do value firms. Also, based on discretionary long-term accruals, during this period, growth firms manage their earnings both upward and downward more aggressively relative to value firms. The analyses by year reveal that differences in earnings management by growth and value firms were more pronounced in the years 2000 and 2001. Also, the analyses by year did not detect significant differences in earnings management practices between growth and value firms for the remaining years examined, that is, 2002 and 2003. This outcome could possibly be attributed to either a reduction in earnings management practices by both growth and value firms or that for the period after 2001, growth firms did not manage their earnings differently from value firms. This issue is left for future research.
This study compares two broad investment categories, that is, growth and value firms. By comparing earnings management practices within investment categories as well as across categories which operate with differing earnings management characteristics, a new approach is developed which may prove beneficial for further research in the field of earnings management and investment categories. The results of this study provide useful insights into how investors incorporate the perceived earnings management practices of growth and value firms in pricing these stocks.