We empirically investigate whether intertemporal transfer of earnings can help improve efficiency of corporate investment decisions. Using the absolute value of discretionary accruals as a measure of such earnings management, we document that earnings management exhibits a concave relationship with the investment sensitivity to investment opportunities measured by Tobin's Q, suggesting that modest earnings managements are associated with improvement in investment-Q sensitivity while excessive

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... nagements undo the potential benefit of earnings managements. We also find that such association is concentrated among high Q firms. We also examine a situation where managers have an incentive to reduce investment in an attempt to meet an earnings target under analysts' pressure and find that the usage of discretionary accruals attenuates the underinvestment problem. Despite the perception that good corporate governance discourage earnings management, we document that the concave relations between accruals management and investment-Q sensitivity is more prevalent among good governance firms, suggesting that better governed firms make use of accruals more wisely. Finally, we explore whether this association is present in a more severe form of earnings management using restatement data. We find weak evidence of positive association between misreporting and investment-Q sensitivity.