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Are accounting estimate changes associated with an aggressive earnings effect? Empirical evidence

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  • Xi Wu
  • Yulong Yang
  • Zhengfei Lu

Abstract

This study investigates the earnings effect associated with two major types of accounting estimate changes (i.e., revision of the percentage allowance for doubtful accounts receivable and revision of the depreciation rate) made by Chinese listed firms during 2003–2011. We find that the more a firm’s accounting estimate diverges from the industry-level estimate for the same category of assets, the more likely is the firm to change the estimate in convergence with (rather than deviating further from) the industry level in the following period. Moreover, the tendency to converge with the industry-level estimate is significantly stronger for previously aggressive estimates than for previously conservative estimates. These findings are consistent with the notion that management discretion in accounting estimates is restrained by the demand for verifiability of accounting information and the firm’s underlying economic forces, thus overall decreasing the degree of earnings aggressiveness.

Suggested Citation

  • Xi Wu & Yulong Yang & Zhengfei Lu, 2015. "Are accounting estimate changes associated with an aggressive earnings effect? Empirical evidence," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 3(1), pages 1-23, January.
    • Handle: RePEc:taf:rcjaxx:v:3:y:2015:i:1:p:1-23
    DOI: 10.1080/21697213.2015.1011823
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