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Detecting Earnings Management: A New ApproachPatricia M. DechowUniversity of California, Berkeley - Haas School of Business Amy P. HuttonBoston College - Carroll School of Management Jung Hoon KimFlorida International University Richard G. SloanUniversity 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 working papers seriesDate posted: January 7, 2011 ; Last revised: October 13, 2011Suggested CitationContact Information
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