How to invest

We examine the relation between both real and accrual-based earnings management activities and firms ’ investment behavior. We find overinvestment in firms that engage in either real or accrual earnings management, but firms that engage in real earnings management overinvest more than firms that engage in accrual earnings management, suggesting that real earnings management may be more detrimental than accrual management. By providing the first evidence that real earnings management has significant real effects on firms ’ investment, we contribute important evidence on the consequences of earnings management. JEL Classification: G14; G32; M4; M4