Do the Johannesburg Stock Exchange Firms Manage Earnings Differently During High- and Low-Sentiment States?

This study investigates how market sentiment impacts earnings management behavior among Johannesburg Stock Exchange (JSE) firms. Using McGregor BFA database (2010–2019), the sentiment index was calculated via price-earnings ratio differences and earnings management via discretionary accruals. The panel corrected standard error (PCSE) results suggest optimistic market states positively influence earnings management, causing increased distortions and less value-relevant reporting. This influence is stronger in high-sentiment states and sensitive to time-varying correlated controls and alternative earnings management measures. These findings underline the need for investors to scrutinize reported earnings, as prevailing sentiment may prompt managers to inflate profits and influence market decisions.