Download this Paper Open PDF in Browser

Earnings Management Proxies: Prudent Business Decisions or Earnings Manipulation?

57 Pages Posted: 13 Jun 2016 Last revised: 17 Oct 2017

Theodore E. Christensen

University of Georgia - J.M. Tull School of Accounting; University of Georgia

Adrienna A. Huffman

Tulane University - A.B. Freeman School of Business

Melissa Fay Lewis-Western

Brigham Young University

Date Written: September 1, 2017

Abstract

Earnings management proxies are frequently used to capture different “earnings management” constructs (e.g., earnings manipulation or beneficial earnings management). We present a simple framework that defines the specific construct of “earnings manipulation” and places it in context with the broader construct of “earnings management.” One distinguishing characteristic of earnings manipulation is that it should be negatively correlated with future operating performance when accruals reverse or the implications of real earnings management are realized. We examine the extent to which common earnings management proxies exhibit this expected relation to determine which measures are more likely to reflect earnings manipulation. Our results indicate substantial variation across earnings management proxies in this characteristic with some proxies consistently exhibiting a positive relation with future operating performance suggesting that these measures, on average, do not reflect earnings manipulation. Supplemental analyses that consider restatements, future returns, and financial reporting incentives yield similar inferences. Our results are important because if researchers interpret increases in these performance-enhancing empirical proxies as evidence of earnings manipulation, they are likely to reach inaccurate conclusions.

Keywords: discretionary accruals; real earnings management, earnings management, financial reporting quality, beneficial earnings management

Suggested Citation

Christensen, Theodore E. and Huffman, Adrienna A. and Lewis-Western, Melissa Fay, Earnings Management Proxies: Prudent Business Decisions or Earnings Manipulation? (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=2793838 or http://dx.doi.org/10.2139/ssrn.2793838

Theodore Christensen

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

University of Georgia ( email )

Athens, GA
United States

Adrienna Huffman (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Melissa Lewis-Western

Brigham Young University ( email )

Provo, UT 84602
United States
801-703-8426 (Phone)

Paper statistics

Downloads
467
Rank
51,524
Abstract Views
1,643