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Quarterly Earnings Patterns and Earnings Management *

Quarterly Earnings Patterns and Earnings Management * Contemporary Accounting Research Vol. 26 No. 3 (Fall 2009) pp. 797–831 © CAAA doi:10.1506/car.26.3.7 Contemporary Accounting Research earnings management efforts concentrated at the fiscal year-end to meet or beat annual targets. Relying on prior anecdotal and empirical evidence of late-year earnings management, we examine firms that have experienced a reversal in the pattern of their quarterly earnings changes. A firm performing poorly in interim quarters may attempt to increase earnings of the fourth quarter to achieve a desired level of annual earnings, whereas a firm performing well in interim quarters may attempt to decrease earnings of the fourth quarter to build “reserves” for the future.3 Specifically, we hypothesize that a firm is more likely than others to have managed year-end earnings upward, if it reports “bad” news in interim quarters and “good” news in the fourth quarter. On the other hand, a firm is more likely than others to have managed year-end earnings downward, if it reports good news in interim quarters and bad news in the fourth. The overarching objective of our study is to examine whether the pattern of quarterly earnings can potentially serve as an indicator of earnings management. First, we determine how prevalent the http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Contemporary Accounting Research Wiley

Quarterly Earnings Patterns and Earnings Management *

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References (42)

Publisher
Wiley
Copyright
2009 Canadian Academic Accounting Association
ISSN
0823-9150
eISSN
1911-3846
DOI
10.1506/car.26.3.7
Publisher site
See Article on Publisher Site

Abstract

Contemporary Accounting Research Vol. 26 No. 3 (Fall 2009) pp. 797–831 © CAAA doi:10.1506/car.26.3.7 Contemporary Accounting Research earnings management efforts concentrated at the fiscal year-end to meet or beat annual targets. Relying on prior anecdotal and empirical evidence of late-year earnings management, we examine firms that have experienced a reversal in the pattern of their quarterly earnings changes. A firm performing poorly in interim quarters may attempt to increase earnings of the fourth quarter to achieve a desired level of annual earnings, whereas a firm performing well in interim quarters may attempt to decrease earnings of the fourth quarter to build “reserves” for the future.3 Specifically, we hypothesize that a firm is more likely than others to have managed year-end earnings upward, if it reports “bad” news in interim quarters and “good” news in the fourth quarter. On the other hand, a firm is more likely than others to have managed year-end earnings downward, if it reports good news in interim quarters and bad news in the fourth. The overarching objective of our study is to examine whether the pattern of quarterly earnings can potentially serve as an indicator of earnings management. First, we determine how prevalent the

Journal

Contemporary Accounting ResearchWiley

Published: Sep 1, 2009

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