Accruals and Managerial Operating Decisions Over the Firm Life Cycle

Posted: 13 Sep 2007

Date Written: September 11, 2007

Abstract

This paper explores the notion that the firm's life cycle is an omitted variable in commonly used discretionary accrual models. I first document a mean positive (negative) bias in discretionary accruals for firms in the growth (decline) stage of their life cycle. To illustrate how the bias can lead to unwarranted inferences, I replicate prior studies' tests for income-increasing (decreasing) earnings management around IPOs (asset write-downs) for recent time periods, and I show how inferences change after controlling for the firm's stage in its life cycle. I then suggest empirical techniques to reduce such bias and improve our understanding of how accruals reflect real operating decisions.

Suggested Citation

Liu, Michelle, Accruals and Managerial Operating Decisions Over the Firm Life Cycle (September 11, 2007). Available at SSRN: https://ssrn.com/abstract=1013536 or http://dx.doi.org/10.2139/ssrn.1013536

Michelle Liu (Contact Author)

CUNY Hunter College ( email )

695 Park Avenue
New York, NY 10065
United States

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