A General Examination of Earnings Management Around Financial Benchmarks

Abstract:     
Most work studying earnings management has focused on the conjecture that managers of firms with earnings otherwise below their benchmarks use their accounting discretion to increase reported earnings with positive discretionary accruals to just barely meet them and have implemented research designs that treat all suspect earnings management firms as engaging in this behavior. We develop a two-way, reported earnings conditional on non-discretionary earnings, research design to examine this conjecture and find a more complex story: earnings management to barely meet benchmarks consisting of positive, negative, large, and small discretionary accounting manipulations – consistent with the weak results found by Dechow et al. [2003], Ayers et al. [2006] and much other work in this area. Our strongly supportive results hold for all the three financial benchmarks (i.e., zero earnings levels, earnings changes, and analyst forecasts) with a number of conservative and robust research designs.

Number of Pages in PDF File: 65

Keywords: earnings managment, discretionary accruals, financial benchmarks

JEL Classification: G31, M40, M41

working papers series