Graduation Year

2026

Date of Submission

12-2025

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics-Accounting

Reader 1

George Batta

Abstract

This paper addresses the question: do firms with a high likelihood of earnings manipulation realize higher returns? For decades now, researchers have attempted to apply relevant parameters in statistical tests to predict when a firm is misstating its financials (i.e. overstating earnings). The ratio of Type I to Type II errors in these results varies with the motive of each researcher or end user. I build on the existing misstatement modeling literature: I start with a widely referenced misstatement prediction model, recreate its most accessible structure using larger, modern data, and apply the model’s predictive capacity to the Fama-French 3-factor and 5-factor asset pricing models. The outcome will not spark hedge funds like Richard Sloan’s 1996 paper on the accrual anomaly. Although not statistically significant, the resulting long-short portfolios probe a novel intersection between earnings misstatement detection and asset pricing.

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This thesis is restricted to the Claremont Colleges current faculty, students, and staff.

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