5. Conclusions and final remarks

The main goal of this chapter has been to measure the impact of earnings management and reporting on market performance. We have sought to examine this phenomenon in a holistic way. Far from a purely statistical correlation analysis, we have sought to examine the phenomenon in light of theories that support this from a management point of view, in an attempt to merge the two together.

The two major theories we have applied include agency theory and social cognitive theory. According to Eisenhardt [12], agency theory is particularly effective when coupled with complementary perspectives. We have therefore created a theoretical model that serves to illustrate our operational model, by showing how this process happens as a whole. While it does describe our two mediating variables, financial reporting quality and investment decision making, we conceptually consider these to be a 'black box' that then allows us to focus more on the relationship of the two variables in the extremes of the model, earnings management and stock performance. Overall, our approach seeks to show how both a cognitive and an agency approach can be used together to demonstrate how a firm's earnings quality can impact on its market performance.

A number of policy recommendations are derived from our findings. First, regulators and those who set accounting standards may find these results useful for assessing the levels of discretion that should be permitted to corporate managers for adjusting their financial reports. Second, our results suggest that individual investors will behave more rationally and be more aware in their investing decisions if the impact of discretionary accruals on the stock price is made more apparent. Overall, we argue that there is a clear need for more transparent financial markets and enhanced corporate governance measures.
