Growth and Accounting Choice

Posted: 30 Jul 2013

See all articles by Ilia D. Dichev

Ilia D. Dichev

Emory University - Department of Accounting

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University

Multiple version iconThere are 2 versions of this paper

Date Written: July 29, 2013


We investigate for a positive relation between growth and the aggressiveness of accounting choices. The motivation is that this relation is an unexamined and very general implication from most existing theories and types of accounting choice. Note that the firms’ decision to use aggressive choices is determined by the joint presence of two factors: specific incentives to increase earnings such as maximizing compensation and also the ability to increase earnings. Growth captures the ability to increase income because an “aggressive” accounting choice will only increase earnings for growing firms and will have no effect or even decrease earnings for no-growth or negative growth firms. Thus, a ranking on growth can be potentially used as a powerful large-sample lens that summarizes the economic importance of many disparate accounting theories and settings of aggressive choice. The empirical tests use a sample of 260,000 observations over the last 50 years and a wide set of nine accounting choices to provide a comprehensive investigation of the hypothesized relation. Our main finding is that there is essentially no reliable relation between growth and aggressive accounting choice. A number of specifications and sensitivity analyses confirm this main finding. In additional tests unrelated to the growth argument, we find no reliable positive correlation between the aggressiveness of individual accounting choices, which implies that companies make no concerted efforts to increase income over the available set of accounting choices. Finally, changes in accounting choice are rare, which implies that accounting choice is a blunt and unwieldy instrument for most aggressive earnings objectives. The conclusion is that visible and long-term accounting choices are seldom used for achieving income-increasing objectives.

Keywords: Accounting choice, aggressiveness, growth

Suggested Citation

Dichev, Ilia D. and Li, Feng, Growth and Accounting Choice (July 29, 2013). Australian Journal of Management, Vol. 38, No. 2, 2013. Available at SSRN:

Ilia D. Dichev (Contact Author)

Emory University - Department of Accounting ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University ( email )

211 West Huaihai Road
Shanghai, Shanghai 200030

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