Dr Abdullah Iqbal co-authored a research paper published in the Review of Quantitative Finance and Accounting

Dr Abdullah Iqbal, Senior Lecturer in Accounting and Finance at Kent Business School, has co-authored a research paper published in Review of Quantitative Finance and Accounting.

The paper entitled ‘The context of earnings management and its ability to predict future stock returns’ offers an innovative way to identify firms that are susceptible to manage earnings.

The research team created an index called ESCORE, which looks at 15 different signals related to earnings management. These signals are grouped into four categories: (i) the incentives for earnings management, (ii) the pressures on managers, (iii) the constraints on managing earnings, and (iv) the firm’s characteristics.

Using a sample of 11,920 firm year observations 1,866 UK companies across 43 industries and found that companies with a low ESCORE outperformed those with a high ESCORE by an average of 1.37% per month. This implies that investors tend to overlook the observable context of earnings management when making investment decisions.

What’s unique about the ESCORE model is that investors do not need to estimate the magnitude of earnings management. Instead, they can look at the surrounding context to differentiate between low and high-earnings management firms. This makes it easier for investors to avoid investing in companies that are likely to manipulate their earnings.

The study has been published in Review of Quantitative Finance and Accounting, you can read the full paper here.

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