Investors’ reaction to managerial discretion over accruals : the case of Jordanian firms

Abstract EN

This paper investigates the difference in the ability of accruals (both discretionary and nondiscretionary), as indicators of earnings quality, and cash flows from operations in measuring firm value.

This issue is associated with the motivation of management to record high accruals for either signaling or for opportunistic purposes.

The study covers all Jordanian manufacturing firms listed in both the first and the second markets in Amman Stock Exchange for the period 1999-2003.

We find that total accruals provide incremental information to investors over cash flows from operations and that Jordanian investors are fixated on net income regardless of firms’ cash flows from operations.

Furthermore, the relationship between discretionary accruals and return is insignificant.

These results might suggest that either discretionary accruals are opportunistic and are negatively priced by the market (evidence of efficiency), or they are informative but negatively priced by the market (evidence of mispricing).

Keywords: Investors, Managerial Discretion, Accruals, Reaction.