Are Discretionary Accruals Signal for the Bright Future? Evidence from Information Search Demand and Supply Matrix

Two competing hypotheses explain the motivation of using discretionary accruals: managerial opportunism and managerial optimism. To the extent of managerial optimism hypothesis, the purpose of my study is to examine whether managers use discretionary accruals to disseminate their private information when the information demand of stakeholders is high while information supply is low. If market participants cannot access sufficient information about a firm, they are likely to make wrong decisions or to postpone making their decisions. If this is the case, managers will attempt to spread their private and optimistic forecasts through discretionary accruals in order to facilitate proper decision making of market participants. Consistent with my predictions, I find (1) managers tend to use more discretionary accruals when the information demand is high while the information supply is low (2) and the discretionary accruals contain favorable signals about the future performance.