How are Earnings Managed? An Examination of Specific Accruals

44 Pages Posted: 15 Feb 2003

See all articles by Christine I. Wiedman

Christine I. Wiedman

University of Waterloo

Carol A. Marquardt

City University of New York (CUNY) – Baruch College

Multiple version iconThere are 2 versions of this paper

Date Written: December 2002

Abstract

This paper explores the use of specific accruals in managing earnings. We argue that the costs of managing earnings through different income statement items vary and that the benefits of earnings management through each of these items are context-dependent. We thus make differential predictions regarding which specific accrual will be used to manage earnings in each of three contexts. To measure earnings management using specific accruals, we develop six performance-matched measures.

Consistent with our predictions, we find that firms issuing equity appear to prefer to manage earnings upward by accelerating revenue recognition, while the opposite is true for firms in the management buyout context. For firms trying to avoid reporting an earnings decrease, we find that special items are significantly more positive.

This paper improves our understanding of how the incentives behind earnings management affect the method used to achieve earnings goals and also illustrates the usefulness of examining specific accruals in different contexts.

JEL Classification: M41, M43

Suggested Citation

Wiedman, Christine I. and Marquardt, Carol, How are Earnings Managed? An Examination of Specific Accruals (December 2002). Available at SSRN: https://ssrn.com/abstract=375660 or http://dx.doi.org/10.2139/ssrn.375660

Carol Marquardt

City University of New York (CUNY) – Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3241 (Phone)

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