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|
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- Fudenberg, Drew & Tirole, Jean, 1995.
"A Theory of Income and Dividend Smoothing Based on Incumbency Rents,"
Journal of Political Economy,
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- repec:bla:joares:v:33:y:1995:i:2:p:263-291 is not listed on IDEAS
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- Degeorge, François & Patel, U & Zeckhauser, Richard, 1998. "Earnings Management to Exceed Thresholds," CEPR Discussion Papers 1790, C.E.P.R. Discussion Papers.
- 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.
- Subramanyam, K. R., 1996. "The pricing of discretionary accruals," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 249-281, October.
- 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. Full references (including those not matched with items on IDEAS)
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