Earnings manipulation and expected returns

Messod D. Beneish, Charles M.C. Lee, D. Craig Nichols

Research output: Contribution to journalArticle

25 Scopus citations

Abstract

An accounting-based earnings manipulation detection model has strong out-of-sample power to predict cross-sectional returns. Companies with a higher probability of manipulation (M-score) earn lower returns on every decile portfolio sorted by size, book-to-market, momentum, accruals, and short interest. The predictive power of M-score stems from its ability to forecast changes in accruals and is most pronounced among low-accrual (ostensibly "high-earnings-quality") stocks. These findings support the investment value of careful fundamental and forensic analyses of public companies.

Original languageEnglish (US)
Pages (from-to)57-82
Number of pages26
JournalFinancial Analysts Journal
Volume69
Issue number2
DOIs
StatePublished - Mar 2013

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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