Environmental Uncertainty and Managers' Use of Discretionary Accruals

Abstract

Although an organization's environmental uncertainty may induce greater variability in reported earnings, managers have incentives to reduce this variability. The flexibility accorded by Generally Accepted Accounting Principles (GAAP) provides managers the means to accomplish this via exercising discretion in recognizing accounting accruals. Thus, we examine the relation between managers' use of discretionary accruals and environmental uncertainty. Overall, evidence suggests managers use discretionary accruals to reduce the variability in reported earnings more when firms operate in high uncertainty.

Keywords: Discretionary Accruals, Environmental Uncertainty, Information Asymmetry, Earnings

JEL Classification: M41, M43, D82, G31