High risk of stock price collapse under real earnings management practices: A literature review

Abstract

This study finds strong evidence that ex-ante real earnings management is positively correlated with collapses of a firm's stock returns, and real earnings management can be used to reduce earnings as well in theory. One of the main potential reasons for managers to reduce income is the homogenization of earnings. When the company is doing well in the current period, managers may choose to spend more on research and development, advertising, employee training, etc. Our further analysis suggests that investors have the potential to sense a high level of true individual manipulation activities, but their ability to do so is therefore limited. When incorporating RM technologies.