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Improving the measures of real earnings management

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  • Anup Srivastava

    (University of Calgary)

Abstract

Firms often change their operating policy to meet a short-term financial reporting target. Accounting researchers call this opportunistic action real earnings management (REM). They measure REM by the difference between a firm’s costs and those reported by its industry peers. Firms that pursue distinct competitive strategies also display different cost patterns than peers. However, the models that measure REM do not control for differences in competitive strategy. Hence a researcher can misinterpret a cost difference that stems from a firm’s competitive strategy as REM. The researcher would also find a spurious correlation between earnings management and a firm characteristic that varies with competitive strategy. A cause or effect relationship with earnings management could be wrongfully inferred. I suggest improvements in measurement models to avoid misspecification.

Suggested Citation

  • Anup Srivastava, 2019. "Improving the measures of real earnings management," Review of Accounting Studies, Springer, vol. 24(4), pages 1277-1316, December.
    • Handle: RePEc:spr:reaccs:v:24:y:2019:i:4:d:10.1007_s11142-019-09505-z
    DOI: 10.1007/s11142-019-09505-z
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    More about this item

    Keywords

    Competitive strategy; Intra-industry homogeneity; Real earnings management; Intangible investments;
    All these keywords.

    JEL classification:

    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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