Performance Matched Discretionary Accrual Measures

47 Pages Posted: 29 Mar 2001

See all articles by S.P. Kothari

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Andrew J. Leone

University of Miami

Charles E. Wasley

Simon School, University of Rochester

Multiple version iconThere are 2 versions of this paper

Date Written: April 2002

Abstract

Prior research shows that extant discretionary accrual models are misspecified when applied to firms with extreme performance. Nonetheless, use of such models in tests of earnings management and market efficiency is commonplace in the literature. We examine the specification and power of the test based on a performance-matched discretionary accrual measure and compare it with traditional discretionary accrual measures (e.g., Jones and Modified-Jones Models). Performance matching is on return on assets and industry and is designed to control for the effect of performance on measured discretionary accruals. The results suggest that our performance-matched discretionary accrual measure is a viable alternative to existing discretionary accrual models for use in earnings management research.

Keywords: Earnings Management, Discretionary Accruals, Performance Matching

JEL Classification: M41, M43

Suggested Citation

Kothari, S.P. and Leone, Andrew J. and Wasley, Charles E., Performance Matched Discretionary Accrual Measures (April 2002). Simon School of Business Working Paper No. FR 01-04; MIT Sloan Working Paper No. 4335-01. Available at SSRN: https://ssrn.com/abstract=264859 or http://dx.doi.org/10.2139/ssrn.264859

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Andrew J. Leone (Contact Author)

University of Miami ( email )

School of Business
Coral Gables, FL 33146
United States
305-284-3101 (Phone)

HOME PAGE: http://sbaleone.bus.miami.edu

Charles E. Wasley

Simon School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3362 (Phone)
585-442-6323 (Fax)

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