Accruals and Managerial Operating Decisions Over the Firm Life Cycle

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.