Managerial Discretion in Accruals and Informational Efficiency

In this paper we examine the relation between managerial discretion in accruals and future informational efficiency. We measure managerial discretion in accruals by the absolute value of discretionary accruals. Assuming that efficient prices follow a random walk, we measure informational efficiency by using stock return variance ratios. Our analysis concentrates on a large sample of non-financial US firms between 1988 and 2007. We find that the absolute value of discretionary accruals is negatively associated with the price deviation from a random walk pattern, estimated in the 12-month period subsequent to the accrual reporting; hence, informational efficiency increases with managerial discretion in accruals. The results are consistent with the view that discretionary accruals, on average, convey useful information to investors and facilitate the price convergence to its fundamental value.

This seminar is organised by the Erasmus Accounting Research Group.