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This paper explores the notion that the firm's life cycle is an omitted variable in commonly used discretionary accrual models. I first document a mean positive (negative) bias in discretionary accruals for firms in the growth (decline) stage of their life cycle. Second, I re-examine prior studies' tests for income-increasing (decreasing) earnings management around IPOs (asset write-downs), and I show how inferences change after controlling for the firm's stage in its life cycle. Last, I show that incorporating controls for life cycle in accrual models leads to comparable, or lower, type I and type II error rates for random samples of discretionary accruals. Robustness tests indicate that these findings are not driven by earnings management incentives.

Accruals and Managerial Operating Decisions Over the Firm Life Cycle