Messod Beneish - Academia.edu (original) (raw)

Papers by Messod Beneish

This paper provides a perspective on the effect of IFRS adoption on the tendency of investors to ... more This paper provides a perspective on the effect of IFRS adoption on the tendency of investors to under-invest in foreign equities. We consider explanations for the home equity bias described in prior research and discuss research relevant to the informational consequences of global adoption of IFRS. Specifically, we evaluate whether IFRS adoption reduces information processing costs or decreases investor uncertainty about either the quality of financial reporting or the distribution of future cash flows. We predict that the effect of any reduction in information processing costs from the adoption of IFRS is likely to be small relative to the effects of other determinants of home bias such as the strength of investor protection mechanisms in foreign countries, behavioral biases toward familiar equities, and informational advantages related to geographical proximity. We conclude that global IFRS adoption is unlikely to reduce home bias and propose avenues for future research.

The Journal of Portfolio Management, Oct 31, 2002

Standard & Poor's has become increasingly aggressive in deleting stocks from the S&P ... more Standard & Poor's has become increasingly aggressive in deleting stocks from the S&P 500 index. Where once it made replacements in the index only when a particular stock had to be removed due to merger or acquisition, corporate restructuring, and bankruptcy filing, S&P now voluntarily removes a company for a variety of reasons, which may include low market capitalization, low share price, dwindling market share, or simply the need to find a spot for an up-and-comer. There are a variety of impacts on share price and trading volume for stocks added to and deleted from the S&P 500 during the period January 1996 through December 2001. For additions, abnormal returns and trading volumes are higher than ever. For deletions, share prices are dealt a crippling blow.

Social Science Research Network, 2006

Social Science Research Network, 2011

Social Science Research Network, 2007

Social Science Research Network, 2001

Page 1. Do Auditor Resignations Convey Private Information About Continuing Audit Clients? Messod... more Page 1. Do Auditor Resignations Convey Private Information About Continuing Audit Clients? Messod D. Beneish, Patrick E. Hopkins, Ivo Ph. Jansen ♣ April 10, 2001 ... Page 2. Do Auditor Resignations Convey Private Information About Continuing Audit Clients? 1. Introduction ...

Social Science Research Network, 1998

In this paper, we compare First Call analyst forecasts to unofficial forecasts of quarterly earni... more In this paper, we compare First Call analyst forecasts to unofficial forecasts of quarterly earnings per share commonly referred to as whisper forecasts. Our analysis yields the following results. First, we find that whispers are, on average, more accurate than First Call forecasts and are better proxies for market expectations of earnings than are First Call forecasts, consistent with the claim in the professional press that whispers are increasingly becoming the true market expectation of earnings. Second, we show that trading strategies based on the relationship between whisper and First Call forecasts earn abnormal returns. Our results, when considered collectively, suggest that whispers contain information not contained in First Call analyst forecasts and that they appear to be widely enough disseminated so that at least part of this information is incorporated in stock prices prior to the earnings release. Formally titled "Whispers and Shouts: Forecasts of Quarterly Earnings Per Share"

Social Science Research Network, 2013

Social Science Research Network, 2019

Although prior work indicates that insider purchases signal undervaluation, there is scant eviden... more Although prior work indicates that insider purchases signal undervaluation, there is scant evidence about what specific information such purchases convey, or what determines the extent of the undervaluation. Our theory explains the nature of the information conveyed by insider purchases, their incidence, and their signaling value. We argue that, conditional on information asymmetry, open market purchases occur when they plausibly signal that risk averse, undiversified insiders are willing to bear incremental wealth risk. Our tests account for limits to the public observability of insiders’ wealth and show, consistent with our predictions, that insider purchases are more frequent and informative in higher-risk contexts which we define, alternatively, as firms with higher fundamental risk (e.g., small, high book-to-market, high volatility firms), firms experiencing riskier circumstances (e.g., poor financial and market performance, low reporting credibility), and firms where insiders’ are exposed to higher risk as a result of their compensation contracts and ownership (e.g., option and share holdings, employment horizon). Further, exploiting our prediction that the signaling value of purchases depends on the increase in the insider’s wealth risk that is inferred by investors, we show that strategies based on linear combinations of the high-risk facets of these factors magnify the abnormal returns to strategies mimicking insider purchases by a factor of two to three. Finally, our results are robust to considering opportunistic/routine partitions of the sample, suggesting that insider purchases are largely strategic.

Issues in Accounting Education, May 1, 1999

I used leverage in the prior year as a proxy for incentives to manipulate earnings that could ari... more I used leverage in the prior year as a proxy for incentives to manipulate earnings that could arise because the firm needs to raise funds or seeks to avoid violating covenants. With the Leverage variable as described above, the model yields an estimated probability of manipulation of approximately three percent. This is three to four times larger that the corresponding probabilities for the median firm in the population and suggests the firm is worthy of further investigation.

Social Science Research Network, 2005

The paper examines the relation between the probability of manipulation, accruals, and future ret... more The paper examines the relation between the probability of manipulation, accruals, and future returns. We show that firms that have a high likelihood of earnings manipulation (as measured by the Beneish (1999)'s M-Score) experience lower future earnings, but that investors expect these firms to have higher future earnings. Indeed, we find that investors overestimate next-period return on assets by 490 to 690 basis points (this is significant as the median ROA in the sample 4.6%). We also show that the probability of manipulation is a correlated omitted variable for the earnings forecasting models used in prior research on accrual mispricing and that including the probability of manipulation greatly attenuates the mispricing of accrual persistence. Finally, we show that the probability of earnings manipulation predicts economically significant abnormal returns of approximately 15% per year after controlling for accruals and various controls for risk factors, including a factor compensating for earnings quality differences (Easley and O'Hara (2004), Francis et al. (2005)). We interpret our results that the predictive ability of accruals for returns is greatly diminished in the presence of the M-Score as indicating that accrual mispricing arises because investors are misled by managers' opportunistic management of earnings.

Social Science Research Network, 2012

Journal of Financial Economics, Jul 1, 2008

While it is well established that diversifying acquisitions by large, cash-rich firms destroy sha... more While it is well established that diversifying acquisitions by large, cash-rich firms destroy shareholder wealth, we document positive abnormal returns to such acquisitions in the tobacco industry. We show that these abnormal returns are associated with proxies for lower expected expropriation costs. Specifically, we show that wealth creation increases in the degree of domestic geographic expansion afforded by the acquisition (increasing tobacco firms' influence in more political districts) and in the liquidity of tobacco firms' assets (converting cash to harder-to-expropriate operating assets). We also show that the threat of expropriation constrains payments to shareholders before expropriation becomes certain in 1998.

The Accounting Review, Oct 1, 2002

This paper investigates whether insider trading is informative about earnings quality and the val... more This paper investigates whether insider trading is informative about earnings quality and the valuation implications of accruals. We show that (1) the one-year-ahead persistence of income-increasing accruals is significantly lower when accompanied by abnormal insider selling and greater when accompanied by abnormal insider buying; (2) the accrual mispricing phenomenon observed in previous work (e.g., Sloan 1996) is due to the mispricing of income-increasing accruals; (3) one-year-ahead hedge returns to trading strategies based on the direction of accruals and insider trading significantly exceed those based on accruals alone; and (4) the lower persistence of income-increasing accruals accompanied by abnormal insider selling appears to be at least partly attributable to opportunistic earnings management. Our evidence suggests that market participants and researchers can use managers' contemporaneous trading in ex ante assessing the likelihood that the firms' accruals are of high or low quality, and in assessing the likelihood of earnings management. Our evidence suggesting that insiders trade on their knowledge of factors associated with accrual persistence is also relevant to policymakers charged with regulating insider trading.

Review of Financial Economics, Jul 6, 2023

We develop a profile of overvalued equity, and show that firms meeting this profile experience ab... more We develop a profile of overvalued equity, and show that firms meeting this profile experience abnormal stock returns net of transaction costs of −22% to −25% over the 12 months following portfolio formation. We show our model is distinct from predictors proposed in prior work, and our results robust to alternative measurements of expected returns. We also show that overvaluation is not confined to small firms and that institutions do not trade as if they identify overvalued equity. The profitable predictability we document suggests a pricing anomaly relating to the 2.5% of the firms in the population that our model identifies as substantially overvalued. Although we believe markets are generally efficient within the bounds of transaction costs, our evidence suggests that violations of minimally rational use of publicly available information do occur. To the extent that anomalies disappear or attenuate once documented in the literature (Doukas et al., 2002 [European Financial Management, 2002, 8, 229]; Schwert, 2003 [Handbook of the Economics of Finance, 2003, 1, 939]), our results are of interest to financial economists and investors.

Social Science Research Network, 2007

Using a sample of 336 firms making reports required by the Sarbanes-Oxley Act, we examine the eff... more Using a sample of 336 firms making reports required by the Sarbanes-Oxley Act, we examine the effect of mandated internal control weaknesses disclosures on information uncertainty for disclosing firms and for size-and performance-matched non-disclosing firms. We find a significantly negative (weakly positive) price response for disclosing (non-disclosing) firms consistent with resolution of information uncertainty in both groups. For disclosing firms we find that the negative market response to disclosure is exacerbated by conditions associated with higher inherent reporting risk, including auditor turnover and high-risk industry membership. However, we find that the negative market response to disclosure is mitigated when the firm has engaged a high quality auditor. In addition, we find that the negative market reaction for disclosing firms is dampened when the firm's previously reported earnings have an abnormally high accruals component. This result is consistent with the disclosure having lower information content when poor earnings quality has already been conveyed by high abnormal accruals.

Social Science Research Network, 2020

People interested in the research are advised to contact the author for the final version of the ... more People interested in the research are advised to contact the author for the final version of the publication, or visit the DOI to the publisher's website. • The final author version and the galley proof are versions of the publication after peer review. • The final published version features the final layout of the paper including the volume, issue and page numbers. Link to publication General rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. • Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain • You may freely distribute the URL identifying the publication in the public portal. If the publication is distributed under the terms of Article 25fa of the Dutch Copyright Act, indicated by the "Taverne" license above, please follow below link for the End User Agreement:

RePEc: Research Papers in Economics, Oct 1, 2014

We examine the economic determinants of short-sale supply, and its consequences for future stock ... more We examine the economic determinants of short-sale supply, and its consequences for future stock returns. Lendable supply increases with expected borrowing costs and decreases with financial statement constructs that indicate overvaluation. Although rising loan fees help ease supply constraints, we find shares are still least available when they are most attractive to short sellers. Using a number of firm characteristics, we derive useful instruments for real-time loan supply and demand conditions in the lending market. Further, we show that (1) when lendable supply is binding (non-binding), short-sale supply (demand) is the main predictor of future stock returns, (2) abnormal returns to the short-side of nine well-known market anomalies are attributable solely to “special” stocks, and (3) loan fees significantly reduce the profitability of the short side and several of these anomalies cease to be profitable. Overall our evidence highlights the central role played by the supply of lendable shares in equity price formation and returns prediction.

Social Science Research Network, Oct 27, 1999

ABSTRACT We examine the stock market effect of changes in the composition of the Dow Jones Indust... more ABSTRACT We examine the stock market effect of changes in the composition of the Dow Jones Industrial Average (DJIA). Unlike S&P 500 listing studies, we find that the price and the trading volume of newly listed DJIA firms are unaffected. We attribute this result to a lack of index fund rebalancing, since index trading is limited for most of our sample period and index funds mimic the S&P 500, not the DJIA. Firms removed from the index, however, experience significant price declines. We consider information signaling, price pressure, imperfect substitutes, and information cost/liquidity explanations for these asymmetric findings. The evidence is consistent with the information cost/liquidity explanation, which holds that investors demand a premium for higher trading costs and for holding securities that have relatively less available information.

Social Science Research Network, 2013

ABSTRACT While it is generally maintained that earnings management can occur to inform as well as... more ABSTRACT While it is generally maintained that earnings management can occur to inform as well as to mislead, evidence that earnings management informs has been scarce, and evidence that credibility increases with signal costliness inexistent. We provide evidence that firms use discretion over financial reporting and real activities to report higher earnings on lower sales from continuing operations. Although these firms defy gravity artificially, we show that the upwards earnings management informs rather than misleads investors. We find that firms that defy gravity (1) report higher future earnings and cash flows, (2) earn higher one-year-ahead abnormal returns, (3) have a positive market reaction to the defying gravity earnings announcement, and (4) their CEOs are more likely to be net buyers in the year preceding the defying gravity event. We also show that the upwards earnings management signal is more credible when it is more costly to achieve: Defying gravity firms perform better when they bear the opportunity loss of not taking a big bath in times of crisis — years where poorer performance can be blamed on economy-wide shocks, and when they have fewer degrees of freedom to report higher earnings.

This paper provides a perspective on the effect of IFRS adoption on the tendency of investors to ... more This paper provides a perspective on the effect of IFRS adoption on the tendency of investors to under-invest in foreign equities. We consider explanations for the home equity bias described in prior research and discuss research relevant to the informational consequences of global adoption of IFRS. Specifically, we evaluate whether IFRS adoption reduces information processing costs or decreases investor uncertainty about either the quality of financial reporting or the distribution of future cash flows. We predict that the effect of any reduction in information processing costs from the adoption of IFRS is likely to be small relative to the effects of other determinants of home bias such as the strength of investor protection mechanisms in foreign countries, behavioral biases toward familiar equities, and informational advantages related to geographical proximity. We conclude that global IFRS adoption is unlikely to reduce home bias and propose avenues for future research.

The Journal of Portfolio Management, Oct 31, 2002

Standard & Poor's has become increasingly aggressive in deleting stocks from the S&P ... more Standard & Poor's has become increasingly aggressive in deleting stocks from the S&P 500 index. Where once it made replacements in the index only when a particular stock had to be removed due to merger or acquisition, corporate restructuring, and bankruptcy filing, S&P now voluntarily removes a company for a variety of reasons, which may include low market capitalization, low share price, dwindling market share, or simply the need to find a spot for an up-and-comer. There are a variety of impacts on share price and trading volume for stocks added to and deleted from the S&P 500 during the period January 1996 through December 2001. For additions, abnormal returns and trading volumes are higher than ever. For deletions, share prices are dealt a crippling blow.

Social Science Research Network, 2006

Social Science Research Network, 2011

Social Science Research Network, 2007

Social Science Research Network, 2001

Page 1. Do Auditor Resignations Convey Private Information About Continuing Audit Clients? Messod... more Page 1. Do Auditor Resignations Convey Private Information About Continuing Audit Clients? Messod D. Beneish, Patrick E. Hopkins, Ivo Ph. Jansen ♣ April 10, 2001 ... Page 2. Do Auditor Resignations Convey Private Information About Continuing Audit Clients? 1. Introduction ...

Social Science Research Network, 1998

In this paper, we compare First Call analyst forecasts to unofficial forecasts of quarterly earni... more In this paper, we compare First Call analyst forecasts to unofficial forecasts of quarterly earnings per share commonly referred to as whisper forecasts. Our analysis yields the following results. First, we find that whispers are, on average, more accurate than First Call forecasts and are better proxies for market expectations of earnings than are First Call forecasts, consistent with the claim in the professional press that whispers are increasingly becoming the true market expectation of earnings. Second, we show that trading strategies based on the relationship between whisper and First Call forecasts earn abnormal returns. Our results, when considered collectively, suggest that whispers contain information not contained in First Call analyst forecasts and that they appear to be widely enough disseminated so that at least part of this information is incorporated in stock prices prior to the earnings release. Formally titled "Whispers and Shouts: Forecasts of Quarterly Earnings Per Share"

Social Science Research Network, 2013

Social Science Research Network, 2019

Although prior work indicates that insider purchases signal undervaluation, there is scant eviden... more Although prior work indicates that insider purchases signal undervaluation, there is scant evidence about what specific information such purchases convey, or what determines the extent of the undervaluation. Our theory explains the nature of the information conveyed by insider purchases, their incidence, and their signaling value. We argue that, conditional on information asymmetry, open market purchases occur when they plausibly signal that risk averse, undiversified insiders are willing to bear incremental wealth risk. Our tests account for limits to the public observability of insiders’ wealth and show, consistent with our predictions, that insider purchases are more frequent and informative in higher-risk contexts which we define, alternatively, as firms with higher fundamental risk (e.g., small, high book-to-market, high volatility firms), firms experiencing riskier circumstances (e.g., poor financial and market performance, low reporting credibility), and firms where insiders’ are exposed to higher risk as a result of their compensation contracts and ownership (e.g., option and share holdings, employment horizon). Further, exploiting our prediction that the signaling value of purchases depends on the increase in the insider’s wealth risk that is inferred by investors, we show that strategies based on linear combinations of the high-risk facets of these factors magnify the abnormal returns to strategies mimicking insider purchases by a factor of two to three. Finally, our results are robust to considering opportunistic/routine partitions of the sample, suggesting that insider purchases are largely strategic.

Issues in Accounting Education, May 1, 1999

I used leverage in the prior year as a proxy for incentives to manipulate earnings that could ari... more I used leverage in the prior year as a proxy for incentives to manipulate earnings that could arise because the firm needs to raise funds or seeks to avoid violating covenants. With the Leverage variable as described above, the model yields an estimated probability of manipulation of approximately three percent. This is three to four times larger that the corresponding probabilities for the median firm in the population and suggests the firm is worthy of further investigation.

Social Science Research Network, 2005

The paper examines the relation between the probability of manipulation, accruals, and future ret... more The paper examines the relation between the probability of manipulation, accruals, and future returns. We show that firms that have a high likelihood of earnings manipulation (as measured by the Beneish (1999)'s M-Score) experience lower future earnings, but that investors expect these firms to have higher future earnings. Indeed, we find that investors overestimate next-period return on assets by 490 to 690 basis points (this is significant as the median ROA in the sample 4.6%). We also show that the probability of manipulation is a correlated omitted variable for the earnings forecasting models used in prior research on accrual mispricing and that including the probability of manipulation greatly attenuates the mispricing of accrual persistence. Finally, we show that the probability of earnings manipulation predicts economically significant abnormal returns of approximately 15% per year after controlling for accruals and various controls for risk factors, including a factor compensating for earnings quality differences (Easley and O'Hara (2004), Francis et al. (2005)). We interpret our results that the predictive ability of accruals for returns is greatly diminished in the presence of the M-Score as indicating that accrual mispricing arises because investors are misled by managers' opportunistic management of earnings.

Social Science Research Network, 2012

Journal of Financial Economics, Jul 1, 2008

While it is well established that diversifying acquisitions by large, cash-rich firms destroy sha... more While it is well established that diversifying acquisitions by large, cash-rich firms destroy shareholder wealth, we document positive abnormal returns to such acquisitions in the tobacco industry. We show that these abnormal returns are associated with proxies for lower expected expropriation costs. Specifically, we show that wealth creation increases in the degree of domestic geographic expansion afforded by the acquisition (increasing tobacco firms' influence in more political districts) and in the liquidity of tobacco firms' assets (converting cash to harder-to-expropriate operating assets). We also show that the threat of expropriation constrains payments to shareholders before expropriation becomes certain in 1998.

The Accounting Review, Oct 1, 2002

This paper investigates whether insider trading is informative about earnings quality and the val... more This paper investigates whether insider trading is informative about earnings quality and the valuation implications of accruals. We show that (1) the one-year-ahead persistence of income-increasing accruals is significantly lower when accompanied by abnormal insider selling and greater when accompanied by abnormal insider buying; (2) the accrual mispricing phenomenon observed in previous work (e.g., Sloan 1996) is due to the mispricing of income-increasing accruals; (3) one-year-ahead hedge returns to trading strategies based on the direction of accruals and insider trading significantly exceed those based on accruals alone; and (4) the lower persistence of income-increasing accruals accompanied by abnormal insider selling appears to be at least partly attributable to opportunistic earnings management. Our evidence suggests that market participants and researchers can use managers' contemporaneous trading in ex ante assessing the likelihood that the firms' accruals are of high or low quality, and in assessing the likelihood of earnings management. Our evidence suggesting that insiders trade on their knowledge of factors associated with accrual persistence is also relevant to policymakers charged with regulating insider trading.

Review of Financial Economics, Jul 6, 2023

We develop a profile of overvalued equity, and show that firms meeting this profile experience ab... more We develop a profile of overvalued equity, and show that firms meeting this profile experience abnormal stock returns net of transaction costs of −22% to −25% over the 12 months following portfolio formation. We show our model is distinct from predictors proposed in prior work, and our results robust to alternative measurements of expected returns. We also show that overvaluation is not confined to small firms and that institutions do not trade as if they identify overvalued equity. The profitable predictability we document suggests a pricing anomaly relating to the 2.5% of the firms in the population that our model identifies as substantially overvalued. Although we believe markets are generally efficient within the bounds of transaction costs, our evidence suggests that violations of minimally rational use of publicly available information do occur. To the extent that anomalies disappear or attenuate once documented in the literature (Doukas et al., 2002 [European Financial Management, 2002, 8, 229]; Schwert, 2003 [Handbook of the Economics of Finance, 2003, 1, 939]), our results are of interest to financial economists and investors.

Social Science Research Network, 2007

Using a sample of 336 firms making reports required by the Sarbanes-Oxley Act, we examine the eff... more Using a sample of 336 firms making reports required by the Sarbanes-Oxley Act, we examine the effect of mandated internal control weaknesses disclosures on information uncertainty for disclosing firms and for size-and performance-matched non-disclosing firms. We find a significantly negative (weakly positive) price response for disclosing (non-disclosing) firms consistent with resolution of information uncertainty in both groups. For disclosing firms we find that the negative market response to disclosure is exacerbated by conditions associated with higher inherent reporting risk, including auditor turnover and high-risk industry membership. However, we find that the negative market response to disclosure is mitigated when the firm has engaged a high quality auditor. In addition, we find that the negative market reaction for disclosing firms is dampened when the firm's previously reported earnings have an abnormally high accruals component. This result is consistent with the disclosure having lower information content when poor earnings quality has already been conveyed by high abnormal accruals.

Social Science Research Network, 2020

People interested in the research are advised to contact the author for the final version of the ... more People interested in the research are advised to contact the author for the final version of the publication, or visit the DOI to the publisher's website. • The final author version and the galley proof are versions of the publication after peer review. • The final published version features the final layout of the paper including the volume, issue and page numbers. Link to publication General rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. • Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain • You may freely distribute the URL identifying the publication in the public portal. If the publication is distributed under the terms of Article 25fa of the Dutch Copyright Act, indicated by the "Taverne" license above, please follow below link for the End User Agreement:

RePEc: Research Papers in Economics, Oct 1, 2014

We examine the economic determinants of short-sale supply, and its consequences for future stock ... more We examine the economic determinants of short-sale supply, and its consequences for future stock returns. Lendable supply increases with expected borrowing costs and decreases with financial statement constructs that indicate overvaluation. Although rising loan fees help ease supply constraints, we find shares are still least available when they are most attractive to short sellers. Using a number of firm characteristics, we derive useful instruments for real-time loan supply and demand conditions in the lending market. Further, we show that (1) when lendable supply is binding (non-binding), short-sale supply (demand) is the main predictor of future stock returns, (2) abnormal returns to the short-side of nine well-known market anomalies are attributable solely to “special” stocks, and (3) loan fees significantly reduce the profitability of the short side and several of these anomalies cease to be profitable. Overall our evidence highlights the central role played by the supply of lendable shares in equity price formation and returns prediction.

Social Science Research Network, Oct 27, 1999

ABSTRACT We examine the stock market effect of changes in the composition of the Dow Jones Indust... more ABSTRACT We examine the stock market effect of changes in the composition of the Dow Jones Industrial Average (DJIA). Unlike S&P 500 listing studies, we find that the price and the trading volume of newly listed DJIA firms are unaffected. We attribute this result to a lack of index fund rebalancing, since index trading is limited for most of our sample period and index funds mimic the S&P 500, not the DJIA. Firms removed from the index, however, experience significant price declines. We consider information signaling, price pressure, imperfect substitutes, and information cost/liquidity explanations for these asymmetric findings. The evidence is consistent with the information cost/liquidity explanation, which holds that investors demand a premium for higher trading costs and for holding securities that have relatively less available information.

Social Science Research Network, 2013

ABSTRACT While it is generally maintained that earnings management can occur to inform as well as... more ABSTRACT While it is generally maintained that earnings management can occur to inform as well as to mislead, evidence that earnings management informs has been scarce, and evidence that credibility increases with signal costliness inexistent. We provide evidence that firms use discretion over financial reporting and real activities to report higher earnings on lower sales from continuing operations. Although these firms defy gravity artificially, we show that the upwards earnings management informs rather than misleads investors. We find that firms that defy gravity (1) report higher future earnings and cash flows, (2) earn higher one-year-ahead abnormal returns, (3) have a positive market reaction to the defying gravity earnings announcement, and (4) their CEOs are more likely to be net buyers in the year preceding the defying gravity event. We also show that the upwards earnings management signal is more credible when it is more costly to achieve: Defying gravity firms perform better when they bear the opportunity loss of not taking a big bath in times of crisis — years where poorer performance can be blamed on economy-wide shocks, and when they have fewer degrees of freedom to report higher earnings.