Keywords
Citation
(2014), "2013 Awards for Excellence", Review of Accounting and Finance, Vol. 13 No. 1. https://doi.org/10.1108/RAF-02-2014-001
Publisher
:Emerald Group Publishing Limited
2013 Awards for Excellence
Article Type: 2013 Awards for Excellence From: Review of Accounting and Finance, Volume 13, Issue 1
The following article was selected for this year’s Outstanding Paper Award for Review of Accounting and Finance
"Assessing earnings management flexibility"
Hiu Lam Choy
Department of Accounting, Drexel University, Philadelphia, Pennsylvania, USA
Purpose – The purpose of this paper is to propose a new measure of earnings management flexibility based on the limits of the allowable set of accruals, prior discretionary accruals used, and the reversal rate of these accruals.
Design/methodology/approach – Quarterly financial data from Compustat for the period 1990-2009 were used to construct the flexibility measure. Then, the author examined how well this measure captures flexibility by investigating its effect on a firms probability of meeting analysts forecasts.
Findings – The results show that this flexibility measure better captures the firm-specific flexibility than that of Barton and Simko which captures mainly the difference in flexibility across industries. Further, the positive effect of their measure on a firms probability of meeting/beating analysts forecasts is not observed in the extended sample period.
Practical implications – The flexibility measure proposed here can assist investors, analysts, or researchers to compare earnings management flexibility across firms in the same industry, which is useful in evaluating the quality of a firms financial reports, stock picking or credit granting decisions.
Originality/value – This paper contributes to the earnings management literature by incorporating both the variation in flexibility used and that in flexibility limits. Second, evidence in this paper suggests that while financial benefits motivate managers to undertake earnings management, flexibility determines the extent of earnings management they can undertake. Third, this study points out that the unreversed discretionary accruals impose a constraint on the level of discretionary accruals a manager can incur in the current period, and hence have an indirect influence on the current reported earnings.
Keywords: Accruals, Analysts forecasts, Earnings, Earnings management, Financial flexibility, Financial markets, Flexibility, Stock markets
http://www.emeraldinsight.com/10.1108/RAF-02-2014-001
This article originally appeared in Volume 11 Number 4, 2012 Review of Accounting and Finance
The following articles were selected for this year’s Highly Commended Award
“Impact of cash holdings and ownership concentration on firm valuation: empirical evidence from Australia
Rashid Ameer
This article originally appeared in Volume 11 Number 4, 2012, Review of Accounting and Finance
“A note on US institutional equity flows to Brazil
Joseph J. French and Wei-Xuan Li
This article originally appeared in Volume 11 Number 3, 2012, Review of Accounting and Finance
“CEO compensation and strategic expenses: penalizing, shielding or rewarding?
Guy D. Fernando and Qiao Xu
This article originally appeared in Volume 11 Number 3, 2012, Review of Accounting and Finance
Outstanding reviewer
Dr Stoyu Ivanov