Download This PaperDetecting Earnings Management: A New Approach
69 Pages Posted: 7 Jan 2011 Last revised: 13 Oct 2011
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: Suggested Citation
Richard G. Sloan (Contact Author)
University of Southern California - Leventhal School of Accounting ( email )
Los Angeles, CA 90089-0441
United States
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