Investment opportunity set, corporate accounting policy and discretionary accruals

This study analyses the effect of the investment opportunity set (IOS) on management use of discretionary accruals. Firms with high IOS have greater information asymmetry. Given the information asymmetry between managers and stockholders, managers of firms with high IOS may engage in income-increasing earnings management to signal firm performance or to achieve personal gains. Our results show that firms with more investment opportunities are more likely to use discretionary accruals to maximize reported earnings. These findings are robust to various discretionary accruals models.