In this study we specify a simple earnings model, present managerial discretion hypotheses from existing literature, and assume efficient markets in order to evaluate five discretionary-accrual models. The five discretionary accrual models are the same as those evaluated in Dechow, Sloan, and Sweeney [1995]. The models are Healy [1985]; DeAngelo [1986]; Jones [1991]; Jones as modified in Dechow, Sloan, and Sweeney [1995]; and the industry model proposed by Dechow and Sloan [1991]. We specify three managerial discretion hypotheses. First, under the performance measure hypothesis, discretionary accruals help managers produce a reliable and more timely measure of firm performance (i.e., earnings) than using nondiscretionary accruals alone. Second, the opportunistic accrual management hypothesis is that discretionary accruals are employed to hide poor performance or postpone a portion of unusually good current earnings to future years. Finally, discretionary accruals are noise in earnings. This is the noise hypothesis. Our contribution is to make the joint hypotheses explicit and generate explicit predictions about the relative variability of earnings components,
The use of accrual models has been pervasive in accounting research in the past ten years. This literature has sought to examine whether and why managers use discretion in finan...
I present evidence consistent with managers using derivatives and discretionary accruals as partial substitutes for smoothing earnings. Using 1994–1996 data for a sample of Fort...
In empirical studies of earnings management (EMI), a central issue is the estimation of the managed component (discretionary accruals) when outsiders observe only the sum of the...
This paper examines the impact of measuring accruals as the change in successive balance sheet accounts, as opposed to measuring accruals directly from the statement of cash flo...
Building on the Dechow et al. (1998) model of the accrual process, this study investigates the role of accruals in predicting future cash flows. The model shows that each accrua...
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