Performance Matched Discretionary Accrual Measures

Posted: 10 Mar 2004

See all articles by S.P. Kothari

S.P. Kothari

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Andrew J. Leone

University of Miami

Charles E. Wasley

Simon School, University of Rochester

Multiple version iconThere are 2 versions of this paper

Abstract

Prior research shows extant discretionary accrual models are misspecified when applied to firms with unusual performance. Nonetheless, research on earnings management and market efficiency frequently uses these models. We examine the specification and power of tests based on performance-matched discretionary accruals, and make comparisons with tests using traditional discretionary accrual measures (e.g., Jones and modified-Jones models). Performance matching on return on assets controls for the effect of performance on measured discretionary accruals. The results suggest that performance-matched discretionary accrual measures enhance the reliability of inferences from earnings management research.

Keywords: Discretionary accruals, earnings management, performance matching, discretionary-accruals models

JEL Classification: M41, C12, C15, M43

Suggested Citation

Kothari, S.P. and Leone, Andrew J. and Wasley, Charles E., Performance Matched Discretionary Accrual Measures. Journal of Accounting & Economics, Vol. 39, No. 1, 2005. Available at SSRN: https://ssrn.com/abstract=509442

S.P. Kothari (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States
617-253-0994 (Phone)
617-253-0603 (Fax)

Andrew J. Leone

University of Miami ( email )

School of Business
Coral Gables, FL 33146
United States
305-284-3101 (Phone)

HOME PAGE: http://sbaleone.bus.miami.edu

Charles E. Wasley

Simon School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3362 (Phone)
585-442-6323 (Fax)

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