Investors’ Reaction to Managerial Discretion over Accruals: The Case of Jordanian Firms

This paper investigates the difference in the ability of accruals (both discretionary and nondiscretionary), asindicators of earnings quality, and cash flows from operations in measuring firm value. This issue is associatedwith the motivation of management to record high accruals for either signaling or for opportunistic purposes.The study covers all Jordanian manufacturing firms listed in both the first and the second markets in AmmanStock Exchange for the period 1999-2003. We find that total accruals provide incremental information toinvestors over cash flows from operations and that Jordanian investors are fixated on net income regardless offirms’ cash flows from operations. Furthermore, the relationship between discretionary accruals and return isinsignificant. These results might suggest that either discretionary accruals are opportunistic and are negativelypriced by the market (evidence of efficiency), or they are informative but negatively priced by the market(evidence of mispricing)