Firm-specific investor sentiment and earnings management: evidence from Brazil

Abstract

PurposeThe purpose of this study is to investigate the influence of firm-specific investor sentiment on Brazilian companies’ accrual-based earnings management between 2010 and 2018. The paper aims to bring deeper insight into the relationship between the investor expectations and managers’ decision-making in an emerging market.Design/methodology/approachThe authors use the quantitative approach and apply a multiple linear regression model to test the relationship among the abnormal accruals, the firm-specific investor sentiment index and the control variables. The final sample includes data from 175 companies, between 2010 and 2018.FindingsThese results reveal a negative association between firm-specific investor sentiment and accrual-based earnings management, which could mean that the risk propensity of managers to manipulate earnings increases when they face known losses in the capital market.Research limitations/implicationsThe research findings provide a valuable understanding of how emerging capital market expectations can influence managerial decisions, such as accrual-based earnings management. The geographical area of study was limited to only Brazil.Originality/valuePrevious studies on developed markets show that market-wide investor sentiment positively influences accrual-based earnings management. However, the present study shows that the firm-specific investor sentiment index has a significant and negative relationship with Brazilian companies’ earnings manipulation, whereas market sentiment indicates contradictory relationship in previous studies in the country.