EQUITY OVERVALUATION AND MANAGERS' CHOICES OF USING OPPORTUNISTIC UNDERLYING EARNINGS REPORTING AND ACCRUALS EARNINGS MANAGEMENT: AUSTRALIAN EVIDENCE

According to Jensen's (2005) agency theory of overvalued equity, firms with overvalued equity have strong incentives to engage in different opportunistic earnings management mechanisms in order to sustain overvaluation. This paper attempts to examine whether the duration of overvaluation influences manager's choice of using different earnings management mechanisms. This paper presents evidence that managers engage in accruals earnings management in the early stage of overvaluation, but at the later stage, firms are more likely to disclose underlying earnings opportunistically to sustain overvaluation. In conclusion, the results of this paper are consistent with Jensen's (2005) agency theory that the duration of firm overvaluation is an important determinant of managers' choosing to use alternative earnings management mechanisms.