Net Operating Assets and Earnings Manipulation

43 Pages Posted: 10 Sep 2021 Last revised: 9 Feb 2024

See all articles by Kevin H. Kim

Kevin H. Kim

Korea Advanced Institute of Science and Technology (KAIST)

Derek Oler

Texas Tech University - Area of Accounting

Date Written: February 7, 2024

Abstract

Income manipulation is often portrayed as a “one time event;” however, we argue and show evidence that manipulations in one year incentivize the firm to manipulate in future years. Earnings-increasing manipulation leaves “footprints” by inflating net operating assets (NOA) and earnings-increasing manipulation is not sustainable over the long term because NOA rapidly becomes inflated to larger-than-normal levels. Stock returns are very high in the year prior to the first year of manipulation, and for firms that maintain a manipulation trend for multiple years, returns remain high in the early years but drop precipitously thereafter and become significantly negative in the year after the manipulation trend ends.

Keywords: Net operating assets, earnings manipulation

JEL Classification: G14, G39

Suggested Citation

Kim, Kevin and Oler, Derek, Net Operating Assets and Earnings Manipulation (February 7, 2024). Available at SSRN: https://ssrn.com/abstract=3918973 or http://dx.doi.org/10.2139/ssrn.3918973

Kevin Kim

Korea Advanced Institute of Science and Technology (KAIST) ( email )

373-1 Kusong-dong
Yuson-gu
Taejon 305-701, 130-722
Korea, Republic of (South Korea)

Derek Oler (Contact Author)

Texas Tech University - Area of Accounting ( email )

P.O. Box 42101
Lubbock, TX 79409
United States
806-834-2354 (Phone)
806-742-3182 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
137
Abstract Views
588
Rank
409,613
PlumX Metrics