Investor sentiment and earnings management in Brazil

• Published in: Revista Contabilidade & Finanças 2020-05, Vol.31 (83), p.283-301
• Main Authors: Santana, Caio Vinicius Santos, Santos, Luis Paulo Guimarães dos, Carvalho Júnior, César Valentim de Oliveira, Martinez, Antonio Lopo
• Format: Article
• Language: English
• Subjects: Accounting; Accruals; behavioral finance; Capital markets; Cash flow; discretionary accruals; Earnings; Earnings management; Generalized method of moments; Investigations; Investments; Investor behavior; investor sentiment; operational decisions; Pessimism; Prices; Profits; Rates of return; Securities markets; Sentiment analysis; Stock exchanges; Stock markets
• ISSN: 1519-7077; 1808-057X
• DOI: 10.1590/1808-057x201909130

ABSTRACT This research analyzes whether there is a temporal association between investor sentiment and earnings management in Brazil. Several studies have investigated the determinants of earnings management, such as factors inside or external to companies and regulatory requirements, but few have considered personal factors, such as investor sentiment in Brazil. With this investigation, it was apparent from the findings that accruals quality is affected by investor sentiment. For participants in the Brazilian capital market, this research reinforces the need for a more careful analysis of the results reported by companies, since managers, in response to investor sentiment, may manage earnings to inflate accounting profit through accruals and influence the market’s ability to price shares correctly. It is evident that accounting choices are much more than just financial decisions and are subject to investor sentiments. The effect of investor sentiment should be considered among the determinants of future earnings management. A sample of non-financial Brazilian companies that traded shares on the Brasil, Bolsa, Balcão (B3) exchange from 2010 to 2016 was used. The investor sentiment index was calculated according to the methodology of Baker and Wurgler (2007). For earnings management, the models of Kang and Sivaramakrishnan (1995), Kothari, Leone, and Wasley (2005), and Dechow, Hutton, Kim, and Sloan (2012) were used. The estimates were carried out through regressions for pooled panel data, fixed, and dynamic effects using the system generalized method of moments (GMM) estimator. Discretionary accruals are positively associated with investor sentiment in the Brazilian capital market, in a similar way to markets with greater informational efficiency and notwithstanding the code-law system. Analyzing low and high sentiment periods separately, the findings suggest that managers increase accruals after high sentiment and reduce them after low sentiment. RESUMO A pesquisa analisa se existe associação temporal entre o sentimento do investidor e o gerenciamento de resultados no Brasil. Vários estudos investigaram os determinantes do gerenciamento de resultados, fatores externos ou internos das empresas e normativos, mas poucos consideraram fatores pessoais, tal como o sentimento dos investidores no Brasil. Com esta investigação, restou patente, pelos achados, que a qualidade dos accruals é afetada pelo sentimento do investidor. Para os participantes do mercado de c