Additional evidence on bonus plans and income management

Additional evidence on bonus plans and income management 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

Additional evidence on bonus plans and income management

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Publisher
Elsevier
Copyright
Copyright © 1995 Elsevier Ltd
ISSN
0165-4101
D.O.I.
10.1016/0165-4101(94)00358-C
Publisher site
See Article on Publisher Site

Abstract

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

Journal of Accounting and EconomicsElsevier

Published: Feb 1, 1995

References

  • Detecting earnings management
    Dechow, Patricia M.; Sloan, Richard G.; Sweeney, Amy P.
  • Annual bonus schemes and the manipulation of earnings
    Holthausen, Robert W.; Larcker, David F.; Sloan, Richard G.

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