Implications of Nondiscretionary Accruals for Earnings Management and Market-Based Research

Posted: 4 Aug 1997

See all articles by Patricia Dechow

Patricia Dechow

USC Marshall School of Business

Jowell S. Sabino

Massachusetts Institute of Technology (MIT)

Richard G. Sloan

University of Southern California - Leventhal School of Accounting

Date Written: May 1997

Abstract

This paper evaluates the implications of nondiscretionary accruals for earnings management and market-based accounting research. We develop a simple model in which earnings management is absent and nondiscretionary accruals perform their intended function of insulating earnings from non-cash working capital shocks. Our analysis indicates that existing techniques for measuring earnings management are likely to misclassify some nondiscretionary accruals as discretionary accruals. Further, we show that certain 'significant' results in existing earnings management research are consistent with the misclassification of nondiscretionary accruals. Finally, we provide a framework for understanding the pricing of cash flow and nondiscretionary accrual components of earnings.

JEL Classification: M41, M43, G12

Suggested Citation

Dechow, Patricia and Sabino, Jowell S. and Sloan, Richard G., Implications of Nondiscretionary Accruals for Earnings Management and Market-Based Research (May 1997). Available at SSRN: https://ssrn.com/abstract=10606

Patricia Dechow

USC Marshall School of Business ( email )

Los Angeles, CA 90089-0441
United States

Jowell S. Sabino (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-1959 (Phone)
617-258-6855 (Fax)

Richard G. Sloan

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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