Accruals and Managerial Operating Decisions Over the Firm Life Cycle
Posted: 13 Sep 2007
Date Written: September 11, 2007
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.
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