The Effect of Alternative Goals on Earnings Management Studies: An Earnings Benchmark Examination

45 Pages Posted: 19 Jul 2008 Last revised: 17 Feb 2011

See all articles by James C. Hansen

James C. Hansen

Weber State University Goddard School of Business and Economics

Date Written: July 18, 2008

Abstract

Firms' management manages earnings because they have incentives or goals to do so. Earnings management studies have to account for these different goals as tests of earnings management can be compromised by the effect of conflicting goals. I illustrate this in the setting of Dechow et al. (2003). Their study examines whether firms with small profits and firms with small losses (loss avoidance benchmark) have differing levels of discretionary accruals. Dechow et al. (2003) find that firms just above the loss avoidance benchmark do not have discretionary accruals that are significantly different than firms just below the benchmark. However, they do not consider firms just below the loss avoidance benchmark that might be using discretionary accruals to avoid missing an alternative benchmark. I find that after I consider these alternate earnings benchmark goals, firms just above the benchmark have significantly higher discretionary accruals. I find similar results for the earnings changes benchmark. These findings highlight the need to consider alternative earnings benchmark goals when examining firms immediately around benchmarks.

Keywords: earnings management, discretionary accruals, earnings benchmarks

JEL Classification: M41, M43

Suggested Citation

Hansen, James C., The Effect of Alternative Goals on Earnings Management Studies: An Earnings Benchmark Examination (July 18, 2008). Journal of Accounting and Public Policy, Vol. 29, No. 5, 2010. Available at SSRN: https://ssrn.com/abstract=1162849

James C. Hansen (Contact Author)

Weber State University Goddard School of Business and Economics ( email )

1337 Edvalson St. Dept 3803
Ogden, UT 84408
United States
801-626-6433 (Phone)

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