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

Abstract

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

Badertscher, Brad A. and Collins, Daniel W. and Lys, Thomas Z., Discretionary Accounting Choices and the Predictive Ability of Accruals with Respect to Future Cash Flows (November 7, 2011). Journal of Accounting & Economics (JAE), 2012. Available at SSRN: https://ssrn.com/abstract=1021030 or http://dx.doi.org/10.2139/ssrn.1021030

Brad A. Badertscher (Contact Author)

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Daniel W. Collins

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0912 (Phone)
319-335-1956 (Fax)

Thomas Z. Lys

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Department of Accounting & Information Systems
Evanston, IL 60208
United States
847-491-2673 (Phone)
847-467-1202 (Fax)

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