Earnings Management Through OCI Components
51 Pages Posted: 6 Apr 2017
Date Written: April 5, 2017
This study examines whether firms transfer income between the income statement and other comprehensive income (OCI) to manage earnings. The results are consistent with managers opportunistically reclassifying income as OCI and OCI as income. Specifically, we find that firms strategically designate and de-designate derivatives in cash flow hedges to reach three earnings benchmarks: meet or beat analysts’ forecasts, meet or beat prior period return on assets (ROA), and avoid reporting a loss in the current period. However, we find that while the increase in transparency of OCI components after the adoption of ASU 2011-05 does not eliminate this practice, it does reduce it significantly.
Keywords: Derivatives, Cash flow hedge accounting, Other comprehensive income, Earnings management
JEL Classification: D21, D22, D23, M40, M41, M48
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