Earnings Co-Movements and Earnings Manipulation

37 Pages Posted: 11 Jun 2013 Last revised: 6 Jan 2017

See all articles by Andrew B. Jackson

Andrew B. Jackson

UNSW Australia Business School, School of Accounting

Brian Rountree

Rice University - Jesse H. Jones Graduate School of Business

Shiva Sivaramakrishnan

Rice University

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2016

Abstract

This study develops a theory that predicts the lower the degree to which firms' earnings are correlated with the industry the greater the probability a firm will issue a biased signal of firm performance. The theory provides for causal predictions in our empirical tests in which we examine the probability a firm will be subject to an Accounting and Auditing Enforcement Release (AAER). The empirical findings provide support for the theory even after controlling for various predictive variables from the prior literature, indicating the degree of earnings co-movements with the industry is in fact a causal factor in managers decisions to bias earnings reports. We further illustrate that low co-movement firms are less conservative than high co-movement firms, which provides an application of our theory to a broader setting. Overall, we provide both a theory and an empirical validation of the theory helping to discipline the thinking about earnings management and allowing for causal relations to be uncovered.

Keywords: Accounting and Auditing Enforcement Releases, Accounting Theory, Earnings Co-Movements, Earnings Management, Market Earnings.

Suggested Citation

Jackson, Andrew B. and Rountree, Brian Robert and Sivaramakrishnan, Shiva, Earnings Co-Movements and Earnings Manipulation (December 1, 2016). UNSW Australian School of Business Research Paper No. 2013 ACCT 01. Available at SSRN: https://ssrn.com/abstract=2277396 or http://dx.doi.org/10.2139/ssrn.2277396

Andrew B. Jackson (Contact Author)

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

Brian Robert Rountree

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Shiva Sivaramakrishnan

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

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