Earnings Management Through OCI Components

51 Pages Posted: 6 Apr 2017

See all articles by Raluca Chiorean

Raluca Chiorean

Lehigh University - Department of Accounting

Michael Kirschenheiter

College of Business Administration University of Illinois at Chicago

Ram T.S. Ramakrishnan

University of Illinois at Chicago

Date Written: April 5, 2017

Abstract

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

Suggested Citation

Chiorean, Raluca and Kirschenheiter, Michael and Ramakrishnan, Ram T.S., Earnings Management Through OCI Components (April 5, 2017). Available at SSRN: https://ssrn.com/abstract=2947818 or http://dx.doi.org/10.2139/ssrn.2947818

Raluca Chiorean

Lehigh University - Department of Accounting ( email )

United States

Michael Kirschenheiter (Contact Author)

College of Business Administration University of Illinois at Chicago ( email )

601 South Morgan Street
11th Floor
Chicago, IL 60607
United States
312.996-2284 (Phone)
312.996-4520 (Fax)

Ram T.S. Ramakrishnan

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States
312-996-3270 (Phone)
312-996-4520 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
201
Abstract Views
1,277
rank
151,029
PlumX Metrics