Previous studies have reached varying conclusions regarding the implications of earnings management using conventional measurements. Addressing these inconsistencies, this study examines 8,723 firm-years from 2004-2010 and develops a measure of earnings management from book-tax differences that reflects both accruals management and taxable income related earnings manipulations. The new measurement is shown to be more comprehensive than conventional earnings management measures focusing on accruals management alone. We use the new measure to study stock price manipulation and find companies can manipulate share prices because investors do not react instantaneously to earnings management accruals and respond with a positive bias in the current year.
Key Words: Taxable income, book income, earnings management
JEL Codes: G100, M410, and M490
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