Accruals mispricing versus risk: Analyzing the influence of external monitoring in Brazil

• Published in: Journal of international financial management & accounting Vol. 32; no. 3; pp. 259 - 282
• Main Authors: Martins, Vinícius Gomes, Machado, Márcio André Veras, Monte, Paulo Aguiar
• Format: Journal Article
• Language: English
• Published: Oxford Blackwell Publishing Ltd 01.10.2021
• Subjects: Accruals; Brazilian market; Corporate governance; Disclosure; Emerging markets; external monitoring; Financial information; Institutional investments; mispricing; risk; Risk exposure; Risk factors; Sophistication; Brazil
• ISSN: 0954-1314; 1467-646X
• DOI: 10.1111/jifm.12136

In this paper, we examine the role of external monitoring as an alternative mechanism of corporate governance pertaining to the risk and mispricing of accruals in the Brazilian market. The results provide evidence of the accruals anomaly for companies with low external monitoring and evidence that is stronger when evaluating the discretionary component of accruals. Our analysis does not support the conclusion that total and discretionary accruals represent price risk factors, which suggests that the evidence of anomaly results from mispricing. Our evidence contributes to the growing literature on accruals pricing in emerging markets, by adding elements such as the influence of external monitoring and the level of investor sophistication, hereby represented by market analysts and institutional investors. Our study provides additional evidence that the presence of these intermediary agents creates an external layer of control capable of contributing positively to the process of disclosure and pricing of financial information. Thus, the role of such intermediaries as external monitors in emerging markets can be potentially significant for correctly pricing accruals. While Brazil has its own unique institutional characteristics, our findings confirm the evidence obtained for other countries.