The pricing of Discretionary Accruals: Empirical Evidence from Tunisia

The accounting literature is replete with studies on earnings management. In general, these studies suggest that managers (attempt to) mislead the market by manipulating the accrual component of earnings. A few studies, however, suggest that the presence of discretionary accruals does not necessarily imply opportunistic behavior by managers. They argue that the presence of discretionary accruals is also consistent with managers using their reporting discretion to smooth earnings and signal their private information (see Watts and Zimmerman, 1986; Hand, 1989; Healy and Palepu, 1993; Subramanyam, 1996; Guay, Kothari, and Watts, 1996 (henceforth GKW), Demski, 1998; and Arya, Glover, and Sunder, 2003). Such use of discretion is referred to as efficient earnings management (EEM). This paper provides some insights on EEM by examining the moderating effect of growth opportunities on both the earnings -return relationship (ERR) and the pricing of discretionary accruals by the tunisian market. Our results show improved ERR and pricing of discretionary accruals in high-growth firms.
Prior studies showed that accrual-based earnings provide a superior measure of firm performance than cash flows (Dechow, 1994) and that the market, on the average, values the discretionary part of accruals (Subramanyam, 1996). Subramanyam's results are consistent with EEM in general but do not address the question of whether the market responds differently to discretionary accruals in different circumstances. In this paper we show that the market prices discretionary accruals in high growth firms significantly more than in low growth firms.
Studying discretionary accruals pricing is important for the following reasons. Unlike other components of earnings, discretionary accruals are more subjective and reflect a higher degree of managerial judgement. This is because earnings constitute the indicator that is of great interest to investors. Thus if investors can not correctly interpret manager's discretion, they will not be in a position to make efficient resource allocation. Furthermore, in our view, there is no study up to now that has examined the pricing of discretionary accruals in the tunisian context so our paper contributes to the existing literature.
The remainder of the paper is organized as follows. Section 2 presents literature review and hypotheses. Section 3 describes the research design and defines the variables and the models used in our analysis. The results are discussed in section 4 and the conclusion is presented in section 5.