Potential Errors in Detecting Earnings Management: Reexamining Studies Investigating the AMT of 1986 *

Potential Errors in Detecting Earnings Management: Reexamining Studies Investigating the AMT of... In this paper we seek to document errors that could affect studies of earnings management. The book income adjustment (BIA) of the alternative minimum tax (AMT) created apparently strong incentives to manage book income downward in 1987. Five earlier papers using different methodologies and samples all conclude that earnings were reduced in response to the BIA. This consensus of findings offers an opportunity to investigate our speculation that methodological biases are more likely when there appear to be clear incentives for earnings management. A reexamination of these studies uncovers potential biases related to a variety of factors, including choices of scaling variables, selection of affected and control samples, and measurement error in estimated discretionary accruals. A reexamination of the argument underlying these studies also suggests that the incentives to manage earnings are less powerful than initially predicted, and are partially mitigated by tax and non‐tax factors. As a result, we believe that the extent of earnings management that occurred in 1987 in response to the BIA remains an unresolved issue. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Contemporary Accounting Research Wiley

Potential Errors in Detecting Earnings Management: Reexamining Studies Investigating the AMT of 1986 *

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Abstract

In this paper we seek to document errors that could affect studies of earnings management. The book income adjustment (BIA) of the alternative minimum tax (AMT) created apparently strong incentives to manage book income downward in 1987. Five earlier papers using different methodologies and samples all conclude that earnings were reduced in response to the BIA. This consensus of findings offers an opportunity to investigate our speculation that methodological biases are more likely when there appear to be clear incentives for earnings management. A reexamination of these studies uncovers potential biases related to a variety of factors, including choices of scaling variables, selection of affected and control samples, and measurement error in estimated discretionary accruals. A reexamination of the argument underlying these studies also suggests that the incentives to manage earnings are less powerful than initially predicted, and are partially mitigated by tax and non‐tax factors. As a result, we believe that the extent of earnings management that occurred in 1987 in response to the BIA remains an unresolved issue.

Journal

Contemporary Accounting ResearchWiley

Published: Dec 1, 2001

References

  • The effects of cross‐sectional scale differences on regression results in empirical research
    Barth, Barth; Kallapur, Kallapur
  • Detecting earnings management
    Dechow, Dechow; Sloan, Sloan; Sweeney, Sweeney
  • Discussion of "Potential errors in detection of earnings management: Reexamining studies investigating the AMT of 1986"
    Dhaliwal, Dhaliwal
  • Financial reporting, tax costs, and book‐tax conformity
    Guenther, Guenther; Maydew, Maydew; Nutter, Nutter

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