Discretionary Accounting Choices and the Predictive Ability of Accruals with Respect to Future Cash Flows
Posted: 15 Oct 2007 Last revised: 8 Feb 2012
Date Written: November 7, 2011
Using a sample of restatement firms and a meet-or-beat model to classify firms as making discretionary accounting choices for opportunistic meet-or-beat (OP-MB) reasons, we show that originally reported earnings and accrual components are less predictive of future cash flows relative to the restated numbers. We find the opposite is true for firms classified as making discretionary accounting choices for non-OP-MB reasons. We consider a number of competing explanations for these latter results. Our findings are most consistent with the informational hypothesis, weakly consistent with conservative-motivated efficient contracting choices, but inconsistent with opportunistic contracting and misapplication/errors of GAAP explanations.
Keywords: Discretionary Accruals, Earnings Management, Restatements, Cash Flow, Predictive Ability of Accruals
JEL Classification: M41, M43, G12, G14
Suggested Citation: Suggested Citation