We investigate the implications of over-investment on the future accounting profitability. And. We investigate the implications of over-investment on the managers' earnings management. That is. our study also examines the association between over-investment and the managers' earnings management. If investment needs much funds, management has generally the incentive to propagate the profitability. benefits. and positive-effects of the investment. With regard to the over- investment, firms have performed much capital expenditures. These much capital expenditures may negatively affect on accounting profitability. To secure funds of these investments. management has generally the incentive to dilute the negative impacts of these capital expenditures on accounting profitability. In our dissertation. on the perspective of earnings management. We focus on what the negative relation between over-investment and future profitability is derived from. That is. We investigate whether the managers' earnings management can partially explain the negative association between over-investments and next accounting performance. In our empirical study. It uses a sample of 4.398 firm-year companies listed in the Korea Stock Exchange during the period of 1999-2006. The test method of the first hypothesis is to regress ROAt+1 (return on assets) on a ROAt. CIR(over-investment), The test methods of the second hypothesis are as follows. Especially, in order to test difference in earnings management between over-investment firms and under-investment firms. our study uses two methods. The first test method is to compare NI(net income), CFO(cash flow from operation). TA(total accruals) and DA(discretionary accruals) using the modified Jones(1995) model between the two groups by using t-tests. The second method is to regress DA(TA) on a over-investment dummy. CFO. firm size. debt ratio and negative earnings. Our empirical results are as follows: First. our empirical results show that the systematic negative association between over-investment and next accounting performance is significantly. Especially, these negative associations are significantly existed during the full period (1981-2006), including the post-IMF(1999-2006). That is, the negative association between over-investment and next accounting performance is driven by the sample of positive-discretionary-investment firms. where over-investment is more likely to occur. rather than by the sample of negative-discretionary-investment firms where under-investment is much less likely. Secondly. We find evidences that over-investment. especially. is significantly associated with the managers' earnings management. That is. these negative relations are derived from the managers' earnings management. Therefore. these negative relations are larger in the firms which have performed over-investment than in the firms which have performed under-investment. Consistent with Wei and Xie(2005). DA in overinvestment firms is significantly associated with CIR. But. the DA in under- investment firms is not significantly associated with the CIR. That is. earnings management is performed to dilute the negative impact of over-investment on the accounting performance. In other words. managers have performed earnings management in order to establish the fixed funds. Besides. these evidences in my study provide an underlying explanation for Titman. Wei and Xie(2004)' notion that managers' empire-building behavior is responsible for the negative association between capital investment and future performance. And. all evidence shows that over-investment may be responsible for the investment-associated earnings management. My contributions are that the test of the negative relation between over-investment and next performance is firstly performed through empirical analysis. Therefore. as the negative relation between over-investment and next performance is identified. which will be contributed in the development of capital market. In conclusion. this paper partially documents that the negative association between over-investments and next accounting performance is associated with the managers' earnings management. There are few studies that examine the relation between capital investment and future profitability, future stock returns in Korea. Therefore. It is expected that this study would develop a framework of linkage between over-investment and future profitability. future stock returns. accruals anomaly in Korea. Besides. evidence in my study represents that over-investment provides an fundamental signal claimed by analysts to be useful in predicting next performance. Also. this study contributes to the extant literatures of financial statement analysis. market efficiency. and investment measurement in Korea.