The use of accruals to manage reported earnings: theory and evidence
This paper develops a model in which firm managers maximize their own compensation by using accruals to manage reported earnings. The results of the model suggest that the form of the managerial compensation function and managerial time preferences may have an important influence on the relationship between accruals and latent earnings. Among the possible relationships suggested by the model are strategies we call Smooth Income, Occasional Big Bath, Live for Today, and Maximize Variability, each of which suggests a different reporting strategy pursued by managers. Most empirical tests of accruals are inconsistent with this and other theoretical models because they include a single earnings variable in a linear regression analysis. Instead, we document the reporting of accruals by two firms, Sunbeam and Citicorp, that is consistent with the “Live for Today” and “Occasional Big Bath” strategies.
|Date of creation:||2000|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.frbatlanta.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
- Degeorge, Francois & Patel, Jayendu & Zeckhauser, Richard, 1999.
"Earnings Management to Exceed Thresholds,"
The Journal of Business,
University of Chicago Press, vol. 72(1), pages 1-33, January.
- Fudenberg, Drew & Tirole, Jean, 1994.
"A Theory of Income and Dividend Smoothing Based on Incumbency Rents,"
IDEI Working Papers
34, Institut d'Économie Industrielle (IDEI), Toulouse.
- Fudenberg, Drew & Tirole, Jean, 1995. "A Theory of Income and Dividend Smoothing Based on Incumbency Rents," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 75-93, February.
- Tirole, Jean & Fudenberg, Drew, 1995. "A Theory of Income and Dividend Smoothing Based on Incumbency Rents," Scholarly Articles 3160494, Harvard University Department of Economics.
- Dechow, Patricia M. & Sloan, Richard G., 1991. "Executive incentives and the horizon problem : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 14(1), pages 51-89, March.
- Subramanyam, K. R., 1996. "The pricing of discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 249-281, October.
- Ahmed, Anwer S. & Takeda, Carolyn & Thomas, Shawn, 1999. "Bank loan loss provisions: a reexamination of capital management, earnings management and signaling effects," Journal of Accounting and Economics, Elsevier, vol. 28(1), pages 1-25, November.
When requesting a correction, please mention this item's handle: RePEc:fip:fedawp:2000-23. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector)
If references are entirely missing, you can add them using this form.