The Impact of Equity Overvaluation on Earnings Management

Abstract

Researches show that if market value of stock in a firm exceeds its true value, this overvaluation affects the managerial behaviors and corporation actions. This research provides evidence on the role of equity overvaluation on income - increasing earnings management in the future. For this purpose the impact of equity overvaluation on subsequent income - increasing earnings management by collection of financial data in 2004 to 2008 years about 60 listed companies in Tehran securities and exchange by using correlation analysis, regression analysis and mean-difference test was tested. Results of research show that equity overvaluation has a positive and significant relationship with subsequent income-increasing earnings management. Indeed in studying companies in Tehran stock exchange, when stock would overvalue by market, firms management tend to support valuation errors to access to benefits of going up stock price through discretionary accruals manipulation.

Keywords

• overvalued equity
• earnings management
• discretionary accruals
• valuation errors