69 Pages Posted: 7 Jan 2011 Last revised: 13 Oct 2011
Date Written: October 2011
This paper provides a new approach to testing for accrual-based earnings management. Our approach exploits the inherent property of accrual accounting that any accrual-based earnings management in one period must reverse in another period. If the researcher has priors concerning the timing of the reversal, incorporating these priors significantly improves the power and specification of tests for earnings management. Our results indicate that incorporating reversals can increase test power by over 40% and also provides a robust solution for mitigating model misspecification arising from correlated omitted variables.
Keywords: Earnings Management, Accruals
JEL Classification: M41
Suggested Citation: Suggested Citation
Dechow, Patricia M. and Hutton, Amy P. and Kim, Jung Hoon and Sloan, Richard G., Detecting Earnings Management: A New Approach (October 2011). Available at SSRN: https://ssrn.com/abstract=1735168 or http://dx.doi.org/10.2139/ssrn.1735168
By Ron Kasznik