Journal article
The Use of Unsigned Earnings Quality Measures in Tests of Earnings Management
Journal of accounting research, Vol.45(5), pp.1017-1053
Received 23 December 2006; accepted 29 May 2007
12/2007
DOI: 10.1111/j.1475-679X.2007.00259.x
Abstract
This paper examines the implications of using the absolute value of discretionary accruals when testing for earnings management. First, we analytically develop the mean and variance of the distribution of absolute discretionary accruals, and show that the expected value is an increasing function of the variance in the underlying error term from the first-stage discretionary accrual estimation model. Second, we highlight several firm characteristics that are related to the error variance in discretionary accrual estimation models. Using simulations, we show that correlation between the earnings management partitioning variable and these firm characteristics leads to an overrejection of the null hypothesis of no earnings management. Third, we provide research design suggestions to help researchers mitigate the potential bias arising from the use of unsigned measures of earnings management. Using these suggestions, we replicate a recent study, and demonstrate that the inferences change after controlling for operating volatility. © University of Chicago on behalf of the Institute of Professional Accounting, 2007.
Details
- Title: Subtitle
- The Use of Unsigned Earnings Quality Measures in Tests of Earnings Management
- Creators
- PAUL Hribar - University of IowaD. CRAIG NICHOLS - Cornell University
- Resource Type
- Journal article
- Publication Details
- Journal of accounting research, Vol.45(5), pp.1017-1053
- Edition
- Received 23 December 2006; accepted 29 May 2007
- Publisher
- Blackwell Publishing Inc
- DOI
- 10.1111/j.1475-679X.2007.00259.x
- ISSN
- 0021-8456
- eISSN
- 1475-679X
- Number of pages
- 37
- Language
- English
- Date published
- 12/2007
- Academic Unit
- Accounting
- Record Identifier
- 9984380451402771
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