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Detecting Earnings Management: A New Approach
Author(s) -
DECHOW PATRICIA M.,
HUTTON AMY P.,
KIM JUNG HOON,
SLOAN RICHARD G.
Publication year - 2012
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2012.00449.x
Subject(s) - accrual , earnings management , econometrics , prior probability , earnings , exploit , power (physics) , accounting , economics , computer science , bayesian probability , artificial intelligence , physics , computer security , quantum mechanics
This paper provides a new approach to test for accrual‐based earnings management. Our approach exploits the inherent property of accrual accounting that any accrual‐based earnings management in one period must reverse in another period. If the researcher has priors concerning the timing of the reversal, incorporating these priors can significantly improve the power and specification of tests for earnings management. Our results indicate that tests incorporating reversals increase test power by around 40% and provide a robust solution for mitigating model misspecification arising from correlated omitted variables.