Modeling Discretionary Accrual Reversal and the Balance Sheet as an Earnings Management Constraint
The Accounting Review, Forthcoming
Posted: 6 Feb 2012 Last revised: 22 Feb 2012
Date Written: December 20, 2010
Abstract
This study presents conceptual and empirical analyses of discretionary accrual reversal in the earnings management context. We specifically focus on the extent that income-increasing (decreasing) discretionary accruals initiated in a prior period reverse to become income-decreasing (increasing) accruals in the current period. The analysis suggests that the extent that such reversals constrain the ability to manage toward earnings objectives depends on both the magnitude of past accrual-based earnings management and the reversal speed of past discretionary accruals. To demonstrate the empirical implications of the analysis, we consider discretionary accrual reversal speed as an additional determinant of the balance sheet constraint on earnings management (Barton and Simko 2002). We show that, conditional on the magnitude of net operating asset overstatement, the probability of achieving quarterly earnings forecasts varies inversely with reversal speed.
Data Availability: Data are available from public sources identified in the paper.
Keywords: earnings management, discretionary accruals, discretionary accrual reversal, reversal speed
JEL Classification: M4, M41
Suggested Citation: Suggested Citation
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