Market Signal to Managers:Effect of Investors’ Private Information on Earnings Management

We study the interactions between financial markets and the real economy, focusing on the effect of investors' private information on earnings management. We use single-level and multi-level regression models, along with the probability of informed trading (PIN), the dynamic measure for the probability of informed trading (DPIN), and the dynamic measure of the probability of informed trading with size effects (SDPIN) to assess private information. We find that managers are less likely to engage in earnings manipulation when stock prices reflect more private information from outside investors. Furthermore, we show that private information has a stronger impact on upward earnings management. Our findings suggest that stock price movements align with the hypotheses of managerial learning, incentive channels, and the flow of information from secondary markets to economic sectors.