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Internal control system, earnings quality, and the dynamics of financial reporting
Author(s) -
Marinovic Iván
Publication year - 2013
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12015
Subject(s) - earnings , control (management) , measure (data warehouse) , quality (philosophy) , earnings response coefficient , econometrics , distribution (mathematics) , earnings management , earnings quality , economics , accounting , computer science , mathematics , data mining , accrual , mathematical analysis , philosophy , management , epistemology
Using an earnings management model in which managers manipulate information when the firm’s control system fails, I introduce a measure of earnings quality, based on the notion of integral precision, that has solid theoretical foundations. A trade‐off between the frequency and the magnitude of overstatements is shown: overstatements are larger when misreporting is less likely. Overall, the model generates a distribution of earnings announcements similar to its empirical analogue and provides a structural method to identify the likelihood and magnitude of misreporting by exploiting information from the moments of the distribution of reported earnings.