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Detecting Earnings Management: A New Approach

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  • PATRICIA M. DECHOW
  • AMY P. HUTTON
  • JUNG HOON KIM
  • RICHARD G. SLOAN

Abstract

This paper provides a new approach to test for accrual‐based earnings management. Our approach exploits the inherent property of accrual accounting that any accrual‐based earnings management in one period must reverse in another period. If the researcher has priors concerning the timing of the reversal, incorporating these priors can significantly improve the power and specification of tests for earnings management. Our results indicate that tests incorporating reversals increase test power by around 40% and provide a robust solution for mitigating model misspecification arising from correlated omitted variables.

Suggested Citation

  • Patricia M. Dechow & Amy P. Hutton & Jung Hoon Kim & Richard G. Sloan, 2012. "Detecting Earnings Management: A New Approach," Journal of Accounting Research, Wiley Blackwell, vol. 50(2), pages 275-334, May.
  • Handle: RePEc:bla:joares:v:50:y:2012:i:2:p:275-334
    DOI: 10.1111/j.1475-679X.2012.00449.x
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