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The effect of ASU 2014–08 on the use of discontinued operations to manage earnings

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  • Yuan Ji

    (Montana State University)

  • James Potepa

    (The George Washington University)

  • Oded Rozenbaum

    (The George Washington University)

Abstract

Accounting regulations require firms to separately disclose the profits and losses from discontinued operations. These discontinued operations are typically excluded from the definition of income used by investors, analysts, and others. Barua, Lin, and Sbaraglia (2010) show that managers manipulate earnings by shifting core expenses into discontinued operations. In light of recent changes in the regulations pertaining to this item, we reexamine this finding. The new rules, which change the criteria for what can be considered discontinued and the associated disclosure requirements, substantially reduce any significant evidence of earnings management using discontinued operations. A decline in the manipulation of large negative discontinued operations drives this reduction. We also find that the new rules decrease the frequency and persistence of discontinued operations.

Suggested Citation

  • Yuan Ji & James Potepa & Oded Rozenbaum, 2020. "The effect of ASU 2014–08 on the use of discontinued operations to manage earnings," Review of Accounting Studies, Springer, vol. 25(4), pages 1201-1229, December.
    • Handle: RePEc:spr:reaccs:v:25:y:2020:i:4:d:10.1007_s11142-020-09535-y
    DOI: 10.1007/s11142-020-09535-y
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    References listed on IDEAS

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    Cited by:

    1. Brooke Beyer & Binod Guragai & Eric T. Rapley, 2021. "Discontinued operations and analyst forecast accuracy," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 595-627, August.

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