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توضیحات

The Effects of Firm Growth and Model Specification Choices on Tests of Earnings Management in Quarterly Settings

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THE ACCOUNTING REVIEW
Vol. 92, No. 2 DOI: 10.2308/accr-51551
March 2017
pp. 69–۱۰۰

American Accounting Association

DOI: 10.2308/accr-51551

Daniel W. Collins
The University of Iowa
Raunaq S. Pungaliya
Sungkyunkwan University
Anand M. Vijh
The University of Iowa

ABSTRACT:

Commonly used Jones-type discretionary accrual models applied in quarterly settings do not adequately control for nondiscretionary accruals that naturally occur due to firm growth.

We show that the relation between quarterly accruals and backward-looking sales growth (measured over a rolling four-quarter window) and forward-looking firm growth (market-to-book ratio) is non-linear.

Failure to control for the effects of firm growth and performance on innate accruals leads to excessive Type I error rates in tests of earnings management. We propose simple refinements to Jones-type models that deal with non-linear growth

and performance effects and show that the expanded models are well-specified and exhibit high power in quarterly settings where one is testing for earnings management.

The expanded models are able to identify the presence of earnings management in a sample of restatement firms.

Our findings have important implications for the use of discretionary accrual models in earnings management research.

Keywords:

earnings management;

discretionary accruals;

firm growth

I. INTRODUCTION

An extensive body of literature in accounting and finance uses Jones-type model discretionary accrual estimates to test for earnings management.

This literature includes studies that test for evidence of earnings management around specific corporate events (e.g., initial public offerings and seasoned equity offerings [IPOs and SEOs], stock acquisitions,

stock repurchases, proxy contests, stock splits, and dividend payments), as well as studies that test for crosssectional differences in earnings management as a function of the firms’ contracting characteristics

(e.g., stock-based management compensation arrangements and debt contracting environment).

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