Big Baths and Earnings Manipulation

34 Pages Posted: 11 Jul 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

Mitchell Oler

University of Wyoming - Department of Accounting

Date Written: June 28, 2024

Abstract

Financial statement manipulation to increase net income often also increases net operating assets (NOA) and when NOA reach larger-than-normal levels future manipulation is constrained (Barton and Simko, 2002). We investigate a strategy available to manipulating firms when NOA grow conspicuously large: a "big bath" where a significant portion of NOA are written off. This has the effect of significantly decreasing net income in the bath year, generating accounting losses and significantly negative abnormal returns. But by reducing NOA a firm with prior history of manipulation can continue manipulating net income future years. This allows the firm to resume the "manipulation life cycle" proposed by Kim and Oler (2024).

Keywords: Big Bath, Financial Statement Manipulation

JEL Classification: M41

Suggested Citation

Kim, Kevin and Oler, Derek and Oler, Mitchell, Big Baths and Earnings Manipulation (June 28, 2024). Available at SSRN: https://ssrn.com/abstract=4884343 or http://dx.doi.org/10.2139/ssrn.4884343

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)

Mitchell Oler

University of Wyoming - Department of Accounting ( email )

United States

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