12 Financial Accounting 5: Earnings Management

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    Disaggregated Financial Statement Comparability
    ( 2020-09-03) Bjornsen, Matt ; Stallings, Matthew
    This study develops a measure of financial statement comparability based on the disaggregated financial accounting components of earnings. The disaggregated financial statement comparability measure in this paper is contrasted with the aggregated (i.e., based solely on aggregate earnings) financial statement comparability measure used in prior research. The disaggregated framework allows for the measurement of comparability between two firms across multiple components of earnings, and enhances the ability to contrast a company's accounting system to that of other companies impacted by similar economic effects. This comparability measure is robust to a rigorous set of analyses, including tests of incremental informativeness, alternative specifications of comparability, and considerations regarding the information environment. The metric developed in this study extends financial reporting quality and financial statement comparability research based on its ability to capture the distinct components of earnings.
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    Earnings management with cash flow hedge accounting
    ( 2020-08-14) Chiorean, Raluca ; Kirschenheiter, Michael ; Ramakrishnan, Ram
    In this study we examine whether firms use cash flow hedge accounting to manage earnings by deferring derivatives gain/loss amounts to other comprehensive income (designating derivatives as cash flow hedges) or transferring derivatives gain/loss amounts from accumulated other comprehensive income to earnings (de-designating derivatives). We find evidence that firms use cash flow hedge accounting to increase earnings towards a target or take a big bath if reported earnings are below analyst forecasts. Further, we find that earnings management incentives are an important determinant in the decisions to designate derivatives as hedges and de-designate derivatives in cash flow hedges. Finally, our results indicate that the increased transparency of other comprehensive income components after the adoption of ASU 2011-05 significantly reduces earnings management with cash flow hedge accounting but does not eliminate it completely.
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    Did Accrual Earnings Management Decline and Real Earnings Management Increase Post-SOX? A Re-examination and Replication
    ( 2020-07-20) Pincus, Morton ; Wu, Shijia ; Hwang, Jasper
    A widely cited paper, Cohen, Dey, and Lys (2008, hereinafter CDL), examines accrual (AEM) and real earnings management (REM) pre- and post-Sarbanes-Oxley. It has been more than a dozen years since CDL's publication and almost 20 years since SOX became law. Our re-examination analyses investigate whether CDL's findings are sensitive to a battery of robustness checks regarding sample construction, model specification, and variable definitions, and whether CDL's conclusions hold after 2005, the end of their sample period. We find support for many of CDL's conclusions, but also evidence suggesting the need to adjust our understanding of the use of AEM and REM post-SOX. CDL's time trends evidence of decreasing AEM and increasing REM is sensitive to some research design choices; and the substitution between AEM and REM that CDL find is attenuated post-SOX, thus cautioning against automatically assuming AEM and REM are substitutes. We also replicate CDL with mixed success.