Modeling Discretionary Accrual Reversal and the Balance Sheet as an Earnings Management Constraint

The Accounting Review, Forthcoming

Posted: 6 Feb 2012 Last revised: 22 Feb 2012

See all articles by William R. Baber

William R. Baber

Georgetown University - Department of Accounting and Business Law

Sok-Hyon Kang

George Washington University - School of Business

Ying Li Compton

George Washington University - School of Business; PwC; Securities and Exchange Commission

Date Written: December 20, 2010

Abstract

This study presents conceptual and empirical analyses of discretionary accrual reversal in the earnings management context. We specifically focus on the extent that income-increasing (decreasing) discretionary accruals initiated in a prior period reverse to become income-decreasing (increasing) accruals in the current period. The analysis suggests that the extent that such reversals constrain the ability to manage toward earnings objectives depends on both the magnitude of past accrual-based earnings management and the reversal speed of past discretionary accruals. To demonstrate the empirical implications of the analysis, we consider discretionary accrual reversal speed as an additional determinant of the balance sheet constraint on earnings management (Barton and Simko 2002). We show that, conditional on the magnitude of net operating asset overstatement, the probability of achieving quarterly earnings forecasts varies inversely with reversal speed.

Data Availability: Data are available from public sources identified in the paper.

Keywords: earnings management, discretionary accruals, discretionary accrual reversal, reversal speed

JEL Classification: M4, M41

Suggested Citation

Baber, William R. and Kang, Sok-Hyon and Compton, Ying Li and Compton, Ying Li, Modeling Discretionary Accrual Reversal and the Balance Sheet as an Earnings Management Constraint (December 20, 2010). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1729417

William R. Baber (Contact Author)

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Sok-Hyon Kang

George Washington University - School of Business ( email )

405 Government Hall
GWU
Washington, DC 20052
United States
(202) 994-6058 (Phone)
(202) 994-5164 (Fax)

Ying Li Compton

George Washington University - School of Business ( email )

2201 G Street NW
Funger 610
Washington, DC 20052
United States
(202)994-1268 (Phone)

PwC ( email )

Thaltej Cross Road, S.G. Highway
Ahmedabad, Gujarat 380054
India

Securities and Exchange Commission ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

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