Performance matched discretionary accrual measures (original) (raw)
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Journal of Business Finance & Accounting, 2009
Abstract: Prior research has shown the prevalence of measurement error in models used to estimate aggregate discretionary accruals. In these models, the incremental information content of the various components of accruals is ignored. Limited prior research and data gathered from firms under Securities and Exchange Commission (SEC) litigation indicate that managers use either one or more than one component of accruals simultaneously, in a consistent way to manipulate bottom-line earnings in a given direction. I propose two measures that capture the consistency between the discretionary components of accruals and test their significance in earnings management (EM) detection in firms that have artificially added accrual manipulation and firms that were targeted by the SEC for accrual manipulation. There is evidence that this information is incrementally useful in detecting EM. This finding paves the way for improvements in the discretionary accruals measure by including consistency information from the components of aggregate accruals.
Asia-Pacific Journal of Accounting & Economics, 2020
We critically examine two important methodological issues related to the estimation of discretionary accruals: the Jones models and the industry approach, both of which are considered the norms in the earnings management studies. We document that the original Jones models are the regression-through-the-origin (RTO) models. The RTO Jones models unduly overstate the significance of PPE and R 2 , produce inconsistent coefficients and non-zero mean discretionary accruals. If we include the intercept in the models, then they lack power. We show that the RTO Jones models are theoretically flawed while their non-RTO variations are empirically flawed. We also address the issue of using the industry approach as a sole approach for the estimation of discretionary accruals. We document that the CFO approach outperforms the industry approach. Lastly, we document that the prediction error method outperforms the estimation error method in detecting earnings management.
Journal of Business Finance <html_ent glyph="@amp;" ascii="&"/> Accounting, 2006
This study examines whether firms with profits before accruals management are more likely than firms with losses before accruals management to meet or exceed earnings benchmarks when pre-managed earnings are below those benchmarks. We extend by documenting that the differential propensity to achieve earnings benchmarks by profitable and nonprofitable firms results from differential accruals management behavior. We find that firms with profits before accruals management are more likely than firms with losses before accruals management to have pre-managed earnings below both analysts' forecasts and prior period earnings and reported earnings above these benchmarks. 6 We also controlled for earnings performance by including ROA directly in equation . The test results are qualitatively similar to the main results reported in . 7 Subramanyam (1996) argues that the cross-sectional model has advantages over the time-series model and that parameter estimates are better specified. Fewer observations are likely to be lost using the cross-sectional model. At least 10 years of data are needed for each firm to estimate the time-series model; many firms would have to be dropped from the sample due to insufficient data, making estimates less precise. Nonstationarity may also be an issue since the time-series is estimated over a minimum of 10 years.
The impact of earning management on market earnings value: the causal study on the level of accruals
The Accounting Journal of Binaniaga
The purpose of this research is to test investors capability to detect earning management after the period of publication, when the information from financial report plays critical role in investment’s decision. Given the feedback of investor’s reaction, this research provides an empirical model, that point out the earnings management as a message or signal of firm performance, particularly of negative perception on accruals’s opportunisties. This research uses path model analysis and multivariate regression, where the data have been collected from 2.560 observations. The unit of analysis of this research was all the listed companies in the period 20012017. The method of sampling was purposive sampling, which based on annual financial report. The findings of this research showed that all public firms have systematic method for earnings management, by distinguishing the positive and negative accruals, the discretionary accruals have the negative influence on the market value signific...
ZANCO Journal of Humanity Sciences, 2017
This paper examines management of earnings through various methods. Focusing in detecting management of earnings on discretionary accrual models which are the most frequently models used in empirical analysis studies nowadays. This paper analyzes specially the relation between discretionary accruals and Dutch firm's performance. Using a sample of the Dutch Stock Exchange (DSX) listed firms with 739 firm-year observations from the period of 1994 to 2010. Discretionary accruals will be estimated based on Jones Model, Modified Jones Model, Cash Flow Modified Jones Model and adjusted Net operating income Modified Jones Model. Moreover, this research is likewise interested in comparing the effect of management of earnings on stock returns in Dutch listed companies. The evidences show that Net operating Income Model presents better influence of management of earnings on estimated discretionary accruals. The average levels of management of earnings activities have been supplementary decreased with adjusted of Net operating Income Modified Jones model.
Earnings Management to Meet Earnings Benchmarks: The Impact on Future Performance
The Economic Research Guardian, 2021
The present study investigates whether firms manipulate earnings to attain specific benchmarks (viz. zero and previous year's earnings) engage in opportunistic or signalling earnings management. Specifically, the study examines the relationship of discretionary accruals with the one year-ahead company performance. The study spans from 2012 to 2018 for 304 firms listed in India. The panel corrected standard error (PCSE) regression estimator is used for the analysis. Our analysis finds evidence of efficient earnings management. Specifically, we find that the discretionary accruals of firms that manage earnings to meet the previous year's profit have a significant positive association with future performance and signals the inside information about the future performance. Further, the results show weak evidence of the relationship between accrual earnings management and future performance among firms meeting zero earnings target. We also study how earnings management relates to the subsequent performance in the absence of earnings benchmarks. The findings show that managers, on average, undertake accrual earnings management to signal future performance.
mohammad mustafa dakhlallh, 2020
Managers manipulate the firm's earnings through earnings management to demonstrate higher performance in the current and future periods. The current study's aimed to examine the influence of accrual-based earnings management (AEM) and actual earnings management (REM) on Jordanian firms' performance. This study examined accrual-based earnings management through discretionary accrual, real earnings management through abnormal operating cash flow and firm performance through Tobin's Q. This study uses the panel data technique to assess the connection between variables. The sample includes 180 companies listed on the Amman Stock Exchange (ASE) from 2009 to 2017. Through the utilize the fixed-effect method in order to investigate the association between selected components with the Jordanian firms' performance, the results of this study indicated that the association between discretionary accrual and abnormal cash flow from operations with Tobin's Q is significantly negatively. The present study shows that firms involved in discretionary accrual and cash flow from operations to report greater earnings in the future have less performance. Hence, it shows that the manipulation of earnings causes issues in the future. Whereas, this study offers empirical evidence to assist stakeholders, managers, and stakeholders in their decision.
The role of earnings management in the relationship between accruals and market value
Investment Management and Financial Innovations
The paper aims to clarify the role of earnings management in the relationship between accruals and the market value of companies. Previous studies suggest that some managers, for providing a desirable image of their performance, manage their profits through distorting cash or accruals. Consequently, investors rely on this information and estimate inaccurate stability of accruals which lead to mispricing phenomenon. Finally, the returns earned by the investors will not be equal to the expected return and thus the accrual anomaly will be created.To this aim, two hypotheses were developed and three regression models were applied to analyze the data. To analyze and estimate the models employed, the financial information of 110 companies listed on the stock exchange between years 2008 to 2014 is used. A selective approach to test the hypotheses is studying cross-sectional data.After conducting statistical tests, the results showed that discretionary accruals through which earnings manage...
Accounting earnings and cash flows as measures of firm performance The role of accounting accruals
under which accruals are predicted to improve earnings' ability to measure firm performance, as reflected in stock returns. The importance of accruals is hypothesized to increase (i) the shorter the performance measurement interval, (ii) the greater the volatility of the firm's working capital requirements and investment and financing activities, and (iii) the longer the firm's operating cycle. Under each of these circumstances, cash flows are predicted to suffer more severely from timing and matching problems that reduce their ability to reflect firm performance. The results of empirical tests are consistent with these predictions.