Abstract

http://ssrn.com/abstract=1735168
 
 

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Detecting Earnings Management: A New Approach


Patricia M. Dechow


University of California, Berkeley - Haas School of Business

Amy P. Hutton


Boston College - Carroll School of Management

Jung Hoon Kim


Florida International University

Richard G. Sloan


University of California at Berkeley - Haas School of Business

October 2011


Abstract:     
This paper provides a new approach to testing for accrual-based earnings management. Our approach exploits the inherent property of accrual accounting that any accrual-based earnings management in one period must reverse in another period. If the researcher has priors concerning the timing of the reversal, incorporating these priors significantly improves the power and specification of tests for earnings management. Our results indicate that incorporating reversals can increase test power by over 40% and also provides a robust solution for mitigating model misspecification arising from correlated omitted variables.

Number of Pages in PDF File: 69

Keywords: Earnings Management, Accruals

JEL Classification: M41

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Date posted: January 7, 2011 ; Last revised: October 13, 2011

Suggested Citation

Dechow, Patricia M. and Hutton, Amy P. and Kim, Jung Hoon and Sloan, Richard G., Detecting Earnings Management: A New Approach (October 2011). Available at SSRN: http://ssrn.com/abstract=1735168 or http://dx.doi.org/10.2139/ssrn.1735168

Contact Information

Patricia M. Dechow
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
Amy P. Hutton
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617 552 1951 (Phone)
Jung Hoon Kim
Florida International University ( email )
University Park
11200 SW 8th Street
Miami, FL 33199
United States
Richard G. Sloan (Contact Author)
University of California at Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
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