Multi-Period Incentives and Alternative Dials for Earnings Management
42 Pages Posted: 2 Sep 1998
Date Written: August 1998
Abstract
Do managers take account of future-period effects, from accrual reversal, when they initiate discretionary accruals in the current period? How do discretionary accruals interact with other earnings management "dials" over time? These issues are important both to the development of a more complete understanding of the economics of financial reporting and to design of research involving discretionary accruals. Addressing these issues requires careful modeling of how discretionary accruals evolve over time, and how discretionary accruals interact with non-discretionary components of earnings. I present an approach to estimating the components of accruals using relations among balance sheet, income statement, and cash flow variables, but without imposing the orthogonality between estimates of discretionary accruals and non-discretionary accruals implied by the ?Jones? approach. I explicitly incorporate the reversal of discretionary accruals, both to facilitate the estimation procedure, and to enable examination of the multi-period implications of discretionary accrual choice. I find evidence of managers taking a strategic, multi-period view when initiating discretionary accruals and of discretionary accruals being used as a complementary means of earnings management to separate disclosure of some elements of earnings.
JEL Classification: M41, M43, C51
Suggested Citation: Suggested Citation
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