Abstract

http://ssrn.com/abstract=1792639
 
 

References (47)



 
 

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Measuring Real Activity Management


Daniel A. Cohen


University of Texas at Dallas - Naveen Jindal School of Management

Shail Pandit


University of Illinois at Chicago

Charles E. Wasley


University of Rochester - Simon Business School

Tzachi Zach


Ohio State University (OSU) - Fisher College of Business

July 28, 2014


Abstract:     
Much recent research focuses on earnings management via the manipulation of real activities (real earnings management, REM). While tests of REM hinge critically on the measurement of abnormal real activities there is no systematic evidence on the properties of commonly-used REM measures or the statistical tests based on them. We provide such evidence by documenting which REM measures lead to well-specified hypothesis tests and which do not. We find that the traditional REM measures used (to date) in the literature are severely mis-specified in that their Type I error rates differ significantly from nominal significance levels. We analyze alternative REM measures based on performance matching and find that while performance-matched REM measures are not well-specified in each and every setting (no REM measure is), the weight of the evidence suggests that across a wide variety of settings they will provide better-specified tests than the traditional REM measures. To concretely demonstrate the importance of our findings for actual accounting research, we reexamine the widely-cited result that managers manipulate real activities to avoid reporting losses. We document that inferences are sensitive to how REM is measured. Specifically, we find that prior published results suggesting that managers manipulate real activities to avoid reporting losses become insignificant when performance-matched REM measures are used. Such evidence highlights the importance of using performance-matched REM measures when testing managers’ real activities manipulation.

Number of Pages in PDF File: 53

Keywords: Real activity management, real earnings management, earnings management, real activity models, test specification, meet or beat, earnings benchmarks, model specification

JEL Classification: M41, C12, C15, M42

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Date posted: March 24, 2011 ; Last revised: July 29, 2014

Suggested Citation

Cohen, Daniel A. and Pandit, Shail and Wasley, Charles E. and Zach, Tzachi, Measuring Real Activity Management (July 28, 2014). Available at SSRN: http://ssrn.com/abstract=1792639 or http://dx.doi.org/10.2139/ssrn.1792639

Contact Information

Daniel A. Cohen
University of Texas at Dallas - Naveen Jindal School of Management ( email )
P.O. Box 830688
Richardson, TX 75083-0688
United States
972-883-4772 (Phone)
972-883-6811 (Fax)
Shailendra Pandit
University of Illinois at Chicago ( email )
601 South Morgan Street
Chicago, IL 60607
United States
(312) 355-1331 (Phone)
(312) 996-4520 (Fax)
HOME PAGE: http://www.uic.edu/cba
Charles E. Wasley
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States
585-275-3362 (Phone)
585-442-6323 (Fax)
Tzachi Zach (Contact Author)
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4101 (Phone)

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