The Pricing of the Real Earnings Management Evidence from Malaysian Stock Exchange

Abstract

This study investigates the usage of real earnings management in the

listed companies in the Malaysian stock market and whether this usage is

informative or opportunistic from the capital market perspective. We used

Roychowdhury model (2006) to estimate three measures of REM namely;

price discounts, discretionary expenses, and manufacturing cost. By using

a sample of the manufacturing industries for the period from 2002 – 2010,

we found evidence about the opportunistic use of the REM to affect the

accounting earnings. But, regarding the capital market perspective, we found

that the investors are unaware of the REM and they are misled by such

practices because they rely heavily on the fixed number of earnings. Thus, the

findings of the study provide evidence about the managers’ tendency to use

REM techniques opportunistically, but the market is unable to evaluate such

practices correctly.