Accounting for Inventory Costs and Real Earnings Management Behavior

40 Pages Posted: 13 Nov 2019

See all articles by Fernando Caio Galdi

Fernando Caio Galdi

Fundacao Instituto Capixaba de Pesquisas em Contabilidade, Economia e Financas (FUCAPE)

E. Scott Johnson

Virginia Tech - Pamplin College of Business

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Date Written: November 4, 2019

Abstract

Prior research finds that managers engage in inventory overproduction to inflate current earnings, but overproduction is associated with significant economic costs. Additionally, Statement of Financial Accounting Standards No. 151 (SFAS 151) introduced new accounting penalties for underproduction. Because firms do not have to overproduce in order to avoid underproduction, and because underproduction generally follows overproduction, we posit that management’s propensity to use overproduction to meet earnings benchmarks should decrease after the adoption of SFAS No. 151, as managers attempt to avoid incurring the costs of overproduction and the underproduction that generally follows.

Consistent with expectations, our findings suggest that SFAS 151 eliminated the tendency of firms to use overproduction to meet benchmarks. Overall, our results suggest that in recent years, managers have generally avoided overproduction, presumably because of the economic costs associated with this practice. These results challenge the view that SFAS 151 inadvertently encouraged overproduction.

Keywords: Real Earnings Management, Inventory Overproduction, SFAS 151, Accounting Standards

JEL Classification: M41

Suggested Citation

Galdi, Fernando Caio and Johnson, E. Scott and Myers, James N. and Myers, Linda A., Accounting for Inventory Costs and Real Earnings Management Behavior (November 4, 2019). Available at SSRN: https://ssrn.com/abstract=3480492 or http://dx.doi.org/10.2139/ssrn.3480492

Fernando Caio Galdi

Fundacao Instituto Capixaba de Pesquisas em Contabilidade, Economia e Financas (FUCAPE) ( email )

Av. Fernando Ferrari, 1358
Vitoria, ES 29075-010
Brazil

HOME PAGE: http://www.fucape.br

E. Scott Johnson

Virginia Tech - Pamplin College of Business ( email )

3114 Pamplin Hall
Blacksburg, VA 24060
United States
2394102250 (Phone)

James N. Myers

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
82
Abstract Views
293
rank
315,715
PlumX Metrics