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Discontinuities and Earnings Management: Evidence from Restatements Related to Securities Litigation

45 Pages Posted: 1 Sep 2009 Last revised: 30 Sep 2011

Dain C. Donelson

University of Texas at Austin - McCombs School of Business

John M. McInnis

University of Texas at Austin - Department of Accounting

Richard Mergenthaler Jr.

The University of Arizona - Eller College of Management

Date Written: September 30, 2011

Abstract

Numerous studies infer earnings management from discontinuities around earnings benchmarks despite no direct evidence of an association. This study provides direct evidence relating discontinuities to earnings management by comparing the distribution of restated earnings to originally-reported earnings among firms that settle accounting-related securities litigation and restate earnings from the alleged GAAP violation period. Discontinuities are not present in the distribution of analyst forecast errors, earnings changes, and earnings levels using restated earnings but are present using originally-reported earnings. These shifts are caused by earnings management and cannot be explained by differences in scaling, sample selection, or other research design issues.

Keywords: Meet or Beat, Earnings Discontinuities, Earnings Management, Securities Litigation, Restatements

JEL Classification: M41

Suggested Citation

Donelson, Dain C. and McInnis, John M. and Mergenthaler, Richard, Discontinuities and Earnings Management: Evidence from Restatements Related to Securities Litigation (September 30, 2011). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1465029 or http://dx.doi.org/10.2139/ssrn.1465029

Dain Donelson

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States
512-232-3733 (Phone)

John McInnis (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

Richard Mergenthaler

The University of Arizona - Eller College of Management ( email )

Tucson, AZ 85721
United States
520-621-2929 (Phone)
520-621-3742 (Fax)

HOME PAGE: http://https://accounting.eller.arizona.edu/people/rick-mergenthaler

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