Abstract

http://ssrn.com/abstract=364581
 
 

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Earnings Management: New Evidence Based on Deferred Tax Expense


John D. Phillips


University of Connecticut - Department of Accounting

Morton Pincus


University of California, Irvine

Sonja O. Rego


Indiana University - Kelley School of Business - Department of Accounting


The Accounting Review, April 2003

Abstract:     
We examine the usefulness of deferred tax expense as compared to various accrual measures employed in prior research in detecting earnings management in three settings where earnings management likely occurs. The motivation for using deferred tax expense to detect earnings management is that there is typically more discretion under generally accepted accounting principles than under tax rules, and we assume that managers exploit such discretion to manage income upwards primarily in ways that do not affect current taxable income. Thus, we expect that decisions to manage earnings upwards will generate book-tax differences that increase deferred tax expense.

Our results provide evidence of the incremental usefulness of deferred tax expense in detecting earnings management activities vis-a-vis total accruals and abnormal accruals derived from two versions of the Jones model. Deferred tax expense is generally incrementally useful beyond all three accruals-based measures with regard to detecting earnings management to avoid an earnings decline and with regard to detecting earnings management to avoid a loss. With regard to meeting analysts' earnings forecasts, only total accruals is incrementally useful in detecting earnings management. We also find that deferred tax expense is significantly more accurate than any of the accrual measures in classifying firm-years as successfully avoiding a loss, whereas no one measure is relatively more accurate than the others in classifying firm-years as successfully avoiding an earnings decline or meeting analysts' forecasts.

Keywords: earnings management, deferred tax expense, accruals

JEL Classification: M40, M41, M43, M49

Accepted Paper Series





Not Available For Download

Date posted: February 12, 2003  

Suggested Citation

Phillips, John D. and Pincus, Morton and Rego, Sonja O., Earnings Management: New Evidence Based on Deferred Tax Expense. The Accounting Review, April 2003. Available at SSRN: http://ssrn.com/abstract=364581

Contact Information

John D. Phillips
University of Connecticut - Department of Accounting ( email )
School of Business
Storrs, CT 06269-2041
United States
860-486-2789 (Phone)
860-486-4838 (Fax)
Morton P.K. Pincus
University of California, Irvine ( email )
Irvine, CA 92697-3125
United States
949-824-4062 (Phone)
949-725-2812 (Fax)
Sonja O. Rego (Contact Author)
Indiana University - Kelley School of Business - Department of Accounting ( email )
1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)
HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

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