Accruals Management to Avoid Losses
Forthcoming in the Journal of Business Finance and Accounting
39 Pages Posted: 2 Aug 2016
Date Written: July 29, 2016
This study examines whether firms engage in accruals management to beat zero earnings benchmark from the perspective of earnings per share (EPS). Based on net income scaled by lagged market value of equity (E/MV) to define just-miss and just-beat test bins, previous studies provide no or inconclusive evidence of accruals management to beat the zero earnings benchmark. I conjecture that because managers focus on shares scaled earnings performance rather than market value scaled earnings performance, forming test bins based on EPS instead of E/MV is a better approach to detect accruals management. As expected, I find evidence of accruals management to beat the zero EPS benchmark. I also find that firms are more likely to manipulate accruals when managers have stronger incentives to beat the zero EPS benchmark. In addition, accruals of firms just beating the zero EPS benchmark more likely reverse next year and result in relatively lower future earnings for firms just beating the benchmark compared with firms just missing the benchmark.
Keywords: Accruals Management; Earnings Benchmark, Zero EPS Benchmark, Zero Net Income Benchmark
JEL Classification: M41
Suggested Citation: Suggested Citation