Detecting Earnings Management: A New Approach

Detecting Earnings Management: A New Approach ABSTRACT This paper provides a new approach to test for accrual‐based earnings management. Our approach exploits the inherent property of accrual accounting that any accrual‐based earnings management in one period must reverse in another period. If the researcher has priors concerning the timing of the reversal, incorporating these priors can significantly improve the power and specification of tests for earnings management. Our results indicate that tests incorporating reversals increase test power by around 40% and provide a robust solution for mitigating model misspecification arising from correlated omitted variables. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

Detecting Earnings Management: A New Approach

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Publisher
Wiley
Copyright
©, University of Chicago on behalf of the Accounting Research Center, 2012
ISSN
0021-8456
eISSN
1475-679X
D.O.I.
10.1111/j.1475-679X.2012.00449.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper provides a new approach to test for accrual‐based earnings management. Our approach exploits the inherent property of accrual accounting that any accrual‐based earnings management in one period must reverse in another period. If the researcher has priors concerning the timing of the reversal, incorporating these priors can significantly improve the power and specification of tests for earnings management. Our results indicate that tests incorporating reversals increase test power by around 40% and provide a robust solution for mitigating model misspecification arising from correlated omitted variables.

Journal

Journal of Accounting ResearchWiley

Published: May 1, 2012

References

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