Net Operating Assets and Earnings Manipulation
43 Pages Posted: 10 Sep 2021 Last revised: 9 Feb 2024
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: Suggested Citation