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http://ssrn.com/abstract=2242251
 
 

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Measuring Intentional GAAP Violations: A Structural Approach


Anastasia A. Zakolyukina


University of Chicago - Booth School of Business

April 25, 2014

Chicago Booth Research Paper No. 13-45

Abstract:     
Based on a sample of about 1,400 CEOs, I estimate the extent of undetected GAAP violations and managers' manipulation costs using a dynamic finite-horizon structural model. The model features a risk-averse manager, who receives cash and equity compensation and maximizes his terminal wealth. I find that the expected cost of manipulation is low. The probability of detection is 6%, and the average misstatement results in a 24% decrease in the manager's wealth if the manipulation is detected and the manger is terminated. Based on the estimated parameters, the implied fraction of CEOs who manipulate at least once during their tenure is 73%; the value-weighted bias in the stock price across manipulating CEOs is 6.97%, and the value-weighted bias in the stock price across all CEOs is 2.82%. Finally, I find that the model-implied measure performs at least six times better in terms of the root mean squared error out-of-sample than any of the five discretionary accruals measures that, in addition to GAAP violations, capture manipulations that do not violate the GAAP.

Number of Pages in PDF File: 67

Keywords: Earnings manipulation, Executive compensation, Earnings restatements

JEL Classification: M41, G34, G38, K22, K42

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Date posted: March 31, 2013 ; Last revised: April 26, 2014

Suggested Citation

Zakolyukina, Anastasia A., Measuring Intentional GAAP Violations: A Structural Approach (April 25, 2014). Chicago Booth Research Paper No. 13-45. Available at SSRN: http://ssrn.com/abstract=2242251 or http://dx.doi.org/10.2139/ssrn.2242251

Contact Information

Anastasia A. Zakolyukina (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773.834.4838 (Phone)
773.926.0941 (Fax)

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