The context of earnings management and its ability to predict future stock returns

Abstract This paper constructs a signal-based composite index, namely ESCORE, which captures the context of earnings management. Specifically, ESCORE aggregates 15 individual signals related to both accrual and real management based on prior relevant literature. After establishing that is capable capturing in more likely occur, study finds low firms outperform those with high by an average 1.37% per month after controlling for risk loadings market, size, book-to-market momentum factors up one year portfolio formation UK. finding implies investors tend ignore observable In addition, model, do not need estimate magnitude management, rather it sufficient look at surrounding differentiate between firms. Finally, when tested using US data, most main results appear hold.