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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.

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.

Suggested Citation

  • Badertscher, Brad A. & Collins, Daniel W. & Lys, Thomas Z., 2012. "Discretionary accounting choices and the predictive ability of accruals with respect to future cash flows," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 330-352.
    • Handle: RePEc:eee:jaecon:v:53:y:2012:i:1:p:330-352
    DOI: 10.1016/j.jacceco.2011.11.003
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    More about this item

    Keywords

    Discretionary accruals; Earnings management; Restatements; Cash flows; Predictive ability of accruals;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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