The Effect of Alternative Goals on Earnings Management Studies: An Earnings Benchmark Examination
45 Pages Posted: 19 Jul 2008 Last revised: 17 Feb 2011
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Detecting Earnings Management: A New Approach
By Patricia Dechow, Amy P. Hutton, ...
-
A Review of the Earnings Management Literature and its Implications for Standard Setting
-
Errors in Estimating Accruals: Implications for Empirical Research
By Daniel W. Collins and Paul Hribar
-
The Economic Implications of Corporate Financial Reporting
By John R. Graham, Campbell R. Harvey, ...
-
The Economic Implications of Corporate Financial Reporting
By John R. Graham, Campbell R. Harvey, ...
-
On the Association between Voluntary Disclosure and Earnings Management
By Ron Kasznik
-
Performance Matched Discretionary Accrual Measures
By S.p. Kothari, Andrew J. Leone, ...
-
The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors
By Ilia D. Dichev and Patricia Dechow