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The Balance Sheet as an Earnings Management Constraint

Jan Barton
Emory University

Paul J. Simko
University of Virginia (UVA) - Darden Graduate School of Business Administration


July 28, 2002


Abstract:     
The balance sheet accumulates the effects of previous accounting choices, so the level of net assets partly reflects the extent of previous earnings management. We predict that managers' ability to optimistically bias earnings decreases with the extent to which the balance sheet overstates net assets relative to a neutral application of GAAP. To test this prediction, we examine the likelihood of reporting various earnings surprises for 3,649 firms during 1993-1999. Consistent with our prediction, we find that the likelihood of reporting larger positive or smaller negative earnings surprises decreases with our proxy for overstated net asset values.

Keywords: articulation between income statement and balance sheet, earnings management constraints, measurement and recognition guidance, earnings surprises, analysts' forecasts

JEL Classifications: M41, M43

Working Paper Series

Date posted: October 21, 2002 ; Last revised: October 28, 2002

Suggested Citation

Barton, Jan and Simko, Paul J., The Balance Sheet as an Earnings Management Constraint (July 28, 2002). Available at SSRN: http://ssrn.com/abstract=320641 or doi:10.2139/ssrn.320641


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Contact Information

Jan Barton (Contact Author)
Emory University ( email )
Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States
404-727-6398 (Phone)
404-727-6313 (Fax)
Paul Simko
University of Virginia (UVA) - Darden Graduate School of Business Administration ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-1391 (Phone)
HOME PAGE: http://www.darden.virginia.edu/faculty/simko.htm
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