Implications of the integral approach and earnings management for alternate annual reporting periods

Implications of the integral approach and earnings management for alternate annual reporting periods We compare the last 12 months’ earnings ending in quarter four (i.e., fiscal year earnings), three, two and one. Lipe and Bernard (2000) offer two competing explanations for higher volatility in fourth quarter earnings relative to other quarters. First, under the integral approach, any estimation errors in the earlier quarters are corrected through fourth quarter earnings, which could make them more volatile. Second, earnings management concentrated in the fourth quarter renders fourth quarter earnings more volatile. While both explanations have similar implications for the properties of quarterly earnings, their implications differ for the properties of annual earnings ending in each quarter. Our result comparing earnings variability is more consistent with earnings management than the integral approach. We examine the relative earnings attributes and find that fiscal year earnings attributes rank lower. Finally, we re-investigate the accrual anomaly and find that the accrual anomaly is more pronounced for fiscal year earnings. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Implications of the integral approach and earnings management for alternate annual reporting periods

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Publisher
Springer US
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Accounting/Auditing; Finance/Investment/Banking; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-013-9235-x
Publisher site
See Article on Publisher Site

Abstract

We compare the last 12 months’ earnings ending in quarter four (i.e., fiscal year earnings), three, two and one. Lipe and Bernard (2000) offer two competing explanations for higher volatility in fourth quarter earnings relative to other quarters. First, under the integral approach, any estimation errors in the earlier quarters are corrected through fourth quarter earnings, which could make them more volatile. Second, earnings management concentrated in the fourth quarter renders fourth quarter earnings more volatile. While both explanations have similar implications for the properties of quarterly earnings, their implications differ for the properties of annual earnings ending in each quarter. Our result comparing earnings variability is more consistent with earnings management than the integral approach. We examine the relative earnings attributes and find that fiscal year earnings attributes rank lower. Finally, we re-investigate the accrual anomaly and find that the accrual anomaly is more pronounced for fiscal year earnings.

Journal

Review of Accounting StudiesSpringer Journals

Published: May 28, 2013

References

  • The conservatism principle and the asymmetric timeliness of earnings
    Basu, S
  • The use of advertising activities to meet earnings benchmarks: Evidence from monthly data
    Cohen, D; Mashruwala, M; Tzachi, Z
  • Quarterly Earnings patterns and earnings management
    Das, S; Shroff, PK; Zhang, H
  • Understanding earnings quality: A review of the proxies, their determinants and their consequences
    Dechow, PM; Ge, W; Schrand, C
  • Detecting earnings management: A new approach
    Dechow, PM; Hutton, AP; Kim, JH; Sloan, RG
  • Large-sample evidence on the debt covenant hypothesis
    Dichev, ID; Skinner, DJ
  • Earnings management? Erroneous inferences based on frequency distributions
    Durtschi, C; Easton, P
  • The cross-section of expected stock returns
    Fama, EF; French, KR
  • The market pricing of accruals quality
    Francis, J; LaFond, R; Olsson, PM; Schipper, K

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