Betting against real earnings management
ISSN: 1321-7348
Article publication date: 14 March 2022
Issue publication date: 5 April 2022
Abstract
Purpose
The study presents the zero investment strategies based on the pricing impact of real earnings management (REM) on stock returns after taking into account the direction and endogeneity nature of REM.
Design/methodology/approach
The authors use standard portfolio methodology and Fama–Macbeth cross-sectional regression to analyze the data for this study. Both upward and downward form of REM has been examined. Accrual earnings management (AEM) has been controlled while examining the association between REM and stock returns.
Findings
The findings demonstrate that the REM anomaly exists in the Indian equity market and is consistent under different market conditions and investment horizons. It is robust after controlling for cross-sectional effects and AEM. Our subsequent analysis suggests that a decile-based zero investment portfolio strategy based on REM loadings generates an annual excess return of 17.90%. The presented annual excess return is highest among quantile and mean-based investment strategies. Further, the authors find that REM sorted proposed investment strategies outperform the AEM sorted investment strategies in all spheres.
Practical implications
The findings suggest that investors can form an arbitrage profitable investment strategy by taking a long position in the bottom 10% of negative REM stocks, and a short position in the top 10% of positive REM stocks.
Originality/value
This is the first study that examines the pricing impact of REM on stock returns and provides zero investment strategies by betting against REM.
Keywords
Citation
Bansal, M. and Ali, A. (2022), "Betting against real earnings management", Asian Review of Accounting, Vol. 30 No. 2, pp. 233-257. https://doi.org/10.1108/ARA-05-2021-0091
Publisher
:Emerald Publishing Limited
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