Discretionary Accruals and Earnings Management: An Analysis of Pseudo Earnings Targets

46 Pages Posted: 12 Dec 2005 Last revised: 13 Nov 2009

See all articles by Benjamin C. Ayers

Benjamin C. Ayers

University of Georgia

John (Xuefeng) Jiang

Michigan State University - Department of Accounting & Information Systems

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: 2006

Abstract

We investigate whether the positive associations between discretionary accrual proxies and beating earnings benchmarks hold for comparisons of groups segregated at other points in the distributions of earnings, earnings changes, and analysts-based unexpected earnings. We refer to these points as "pseudo" targets. Results suggest that the positive association between discretionary accruals and beating the profit benchmark extends to pseudo targets throughout the earnings distribution. We find similar results for the earnings change distribution. In contrast, we find few positive associations between discretionary accruals and beating pseudo targets derived from analysts-based unexpected earnings. We develop an additional analysis that accounts for the systematic association between discretionary accruals and earnings and earnings changes. Results suggest that the positive association between discretionary accruals and earnings intensifies around the actual profit benchmark (i.e., where earnings management incentives may be more pronounced). We find similar effects around the actual earnings increase benchmark. However, analogous patterns exist for cash flows around the profit and earnings increase benchmarks. In sum, we are unable to eliminate other plausible explanations for the associations between discretionary accruals and beating the profit and earnings increase benchmarks.

Keywords: Discretionary accruals, Earnings management, Earnings benchmarks

Suggested Citation

Ayers, Benjamin C. and Jiang, John (Xuefeng) and Yeung, P. Eric, Discretionary Accruals and Earnings Management: An Analysis of Pseudo Earnings Targets (2006). Accounting Review, Vol. 81, No. 3, pp. 617-652, 2006; AAA 2005 Financial Accounting and Reporting Section (FARS) Meeting. Available at SSRN: https://ssrn.com/abstract=589448

Benjamin C. Ayers (Contact Author)

University of Georgia ( email )

Athens, GA 30602
United States
706-542-3772 (Phone)
706-542-3630 (Fax)

John (Xuefeng) Jiang

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-432-3031 (Phone)
517-432-1101 (Fax)

HOME PAGE: http://www.msu.edu/~jiangj/

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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