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http://ssrn.com/abstract=1823835
 
 

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The Effects of Firm Growth and Model Specification Choices on Tests of Earnings Management in Quarterly Settings


Daniel W. Collins


University of Iowa - Department of Accounting

Raunaq S. Pungaliya


Sungkyunkwan University (SKK) Graduate School of Business

Anand M. Vijh


University of Iowa - Department of Finance

December 1, 2012


Abstract:     
Commonly used Jones-type discretionary accrual models applied in quarterly settings do not adequately control for nondiscretionary working capital accruals that naturally occur due to firm growth. This biases tests of earnings management in many settings where the partitioning variable is correlated with firm growth (such as stock splits, SEOs, stock acquisitions, and stock-based compensation). We show that there is a severe problem of falsely rejecting the null hypothesis of no earnings management in samples over-represented by high growth or low growth firms when using performance-adjusted discretionary accruals. In contrast, discretionary accrual models that control for both performance and firm growth are well specified and do not sacrifice power. Including adjustments for accruals’ noise reduction and timely loss recognition roles further improves the model power.

Number of Pages in PDF File: 59

Keywords: Discretionary Accruals, Earnings Management, Performance Matching, Firm Growth

JEL Classification: M41, M43

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Date posted: April 27, 2011 ; Last revised: September 8, 2013

Suggested Citation

Collins, Daniel W. and Pungaliya, Raunaq S. and Vijh, Anand M., The Effects of Firm Growth and Model Specification Choices on Tests of Earnings Management in Quarterly Settings (December 1, 2012). Available at SSRN: http://ssrn.com/abstract=1823835 or http://dx.doi.org/10.2139/ssrn.1823835

Contact Information

Daniel W. Collins (Contact Author)
University of Iowa - Department of Accounting ( email )
108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)
Raunaq S. Pungaliya
Sungkyunkwan University (SKK) Graduate School of Business ( email )
53 Myeongnyun-dong 3-ga Jongno-ju
Seoul, 110-745
Korea
Anand M. Vijh
University of Iowa - Department of Finance ( email )
Iowa City, IA 52242-1000
United States
319-335-0921 (Phone)
319-335-3609 (Fax)
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