We extend Healy (1985) by examining the relation between discretionary accruals and bonus plan bounds for a sample of 102 firms for the 1980–1990 period. Contrary to Healy, we find that when earnings before discretionary accruals fall below the lower bound, managers select income- increasing discretionary accruals (and vice versa). We believe that our results are more consistent with the income smoothing hypothesis than with Healy's bonus hypothesis. However, mechanical selection bias in portfolio formation cannot be entirely ruled out as an alternative explanation for our results.
Journal of Accounting and Economics – Elsevier
Published: Feb 1, 1995
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