Real Earnings Management and Subsequent Operating Performance*

34 Pages Posted: 2 Sep 2009  

Denise Leggett

University of Alabama

Linda M. Parsons

University of Alabama - Culverhouse School of Accountancy

Austin L. Reitenga

University of Alabama

Date Written: September 1, 2009

Abstract

Real earnings management (REM) is the manipulation of business activities to meet an earnings threshold. Despite concern that REM activities create real economic costs, research on the relation between REM and subsequent operating performance is inconclusive. We develop two firm-level methods of estimating abnormal discretionary expenditures and implement a more proactive method of identifying REM activity. Using firm-level estimates of abnormal expenditures, we find strong evidence that REM is negatively related to subsequent period return on assets and cash flows from operations. Our results suggest that the inconclusive results in prior research may be in part due to estimating abnormal expenditures using industry-level models.

Keywords: Real earnings management, discretionary expenditures, operating performance

JEL Classification: M41

Suggested Citation

Leggett, Denise and Parsons, Linda M. and Reitenga, Austin L., Real Earnings Management and Subsequent Operating Performance* (September 1, 2009). Available at SSRN: https://ssrn.com/abstract=1466411 or http://dx.doi.org/10.2139/ssrn.1466411

Denise Leggett (Contact Author)

University of Alabama ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

Linda M. Parsons

University of Alabama - Culverhouse School of Accountancy ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

Austin L. Reitenga

University of Alabama ( email )

Culverhouse College of Commerce
Box 870223
Tuscaloosa, AL 78249
United States
205-348-5780 (Phone)

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