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Discretionary accounting choices and the predictive ability of accruals with respect to future cash flows

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  • Badertscher, Brad A.
  • Collins, Daniel W.
  • Lys, Thomas Z.
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    Abstract

    Using a sample of restatement firms and a meet-or-beat model to classify firms as making discretionary accounting choices for opportunistic meet-or-beat (OP-MB) reasons, we show that originally reported earnings and accrual components are less predictive of future cash flows relative to the restated numbers. We find the opposite is true for firms classified as making discretionary accounting choices for non-OP-MB reasons. We consider a number of competing explanations for these latter results. Our findings are most consistent with the informational hypothesis, weakly consistent with conservative-motivated efficient contracting hypotheses, but inconsistent with opportunistic contracting and misapplication/errors of GAAP explanations.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 53 (2012)
    Issue (Month): 1 ()
    Pages: 330-352

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    Handle: RePEc:eee:jaecon:v:53:y:2012:i:1:p:330-352

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    Web page: http://www.elsevier.com/locate/jae

    Related research

    Keywords: Discretionary accruals; Earnings management; Restatements; Cash flows; Predictive ability of accruals;

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    References

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    Cited by:
    1. Forough Heirany & Mahmoud Moeinadin & Manije Nazemizadeh, 2014. "The Role of Accrual Decomposition in Increasing the Information Value," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(1), pages 309-318, January.
    2. Dan Dacian Cuzdriorean, 2013. "Most Recent Findings In Earnings Management Area: Interesting Insights From Traditionally Top 5 Leading Accounting Journals," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(15), pages 5.

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