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Abstract
This paper examines how firm growth conditions the pricing of discretionary accruals. Given the rich growth opportunities and high information asymmetry in high-growth firms, we expect that managers have incentives to use discretionary accruals, especially income increasing (positive) discretionary accruals, to signal favorable private information to external investors. Our empirical tests reveal that overall there is no significant difference in the pricing of discretionary accruals between high-growth and low-growth firms. However, consistent with our expectations, we find that in high-growth firms compared to low-growth firms, positive discretionary accruals are priced to a greater extent, while negative discretionary accruals are priced to a smaller extent. Additional tests show that positive discretionary accruals have a relatively greater association with future firm performance in high-growth firms. Finally, we find that the pricing of positive discretionary accruals in high-growth firms is predominantly in those firms with high levels of information asymmetry.