Detecting Earnings Management: A New Approach

69 Pages Posted: 7 Jan 2011 Last revised: 13 Oct 2011

Patricia M. Dechow

University of California, Berkeley - Accounting Group

Amy P. Hutton

Boston College - Carroll School of Management

Jung Hoon Kim

Florida International University

Richard G. Sloan

University of California, Berkeley - Accounting Group

Date Written: October 2011

Abstract

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

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

Patricia M. Dechow

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Amy P. Hutton

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617 552 1951 (Phone)

Jung Hoon Kim

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Richard G. Sloan (Contact Author)

University of California, Berkeley - Accounting Group ( email )

Haas School of Business
Berkeley, CA 94720
United States

Paper statistics

Downloads
4,256
Rank
1,450
Abstract Views
20,307