106 research outputs found
Detecting earnings management using cross-sectional abnormal accruals models
No full textThis paper examines specification and power issues in relation to three models used to estimate abnormal accruals. In contrast to the majority of prior work evaluating models estimated in time-series, we examine the performance of cross-sectionally estimated models. In addition to testing the standard-Jones (Jones, 1991) and modified-Jones (Dechow et al., 1995) models, we also develop and test a new specification, labelled the ‘margin model’. Consistent with prior US research employing time-series specifications of the two Jones models, our findings suggest that each of the three cross-sectional models are well specified when applied to a random sample of firm-years. However, the margin model appears to generate relatively better specified estimates of abnormal accruals when cash flow performance is extreme. Analysis of the models' ability to detect artificially induced earnings management indicates that all three procedures are capable of generating relatively powerful tests for economically plausible levels of accruals management (e.g., less than 10% of lagged total assets). Regarding their relative performance, the standard-Jones and modified-Jones models are found to be more powerful for revenue and bad debt manipulations. In contrast, the margin appears to be more powerful at detecting non-bad debt expense manipulations
Reflections on the revision of the IASB framework by EAA academics
No full textThe paper has been developed as part of the deliberations of the European Accounting Association Financial Reporting Standards Committee (EAA FRSC) on the IASB Conceptual Framework project. Members of the EAA FRSC are—in alphabetical order—Graeme Dean (The University of Sydney), Lisa Evans (University of Stirling), Günther Gebhardt (Chair, Goethe Universität Frankfurt am Main), Martin Hoogendoorn (RSM Erasmus-University), Jan Marton (Göteborg University), Ken Peasnell (Lancaster University), Roberto Di Pietra (Università degli Studi di Siena), Araceli Mora (Universidad de Valencia), Frank Thinggård (Aalborg University) and Alfred Wagenhofer (Karl-Franzens-Universität Graz)
Second Thoughts on the Analytical Properties of Earned Economic Income
No full textThe present paper amends the two propositions in Peasnell (1995) concerning the fitness of J. R. Grinyer’s ‘earned economic income’ (EEI) model for its declared purpose of evaluating managerial performance in the light of comments in Grinyer (1995). Proposition I now includes the requirement that the profitability index is the same for each depreciable asset in the multi-asset firm in order for EEI to yield the same answers as the net present value (NPV) of the firm itself. Proposition II is now adjusted to reflect the possibility that errors in forecasted benefits can be large in magnitude. The new version distinguishes between random forecast errors and ‘earnings management’. The original result concerning the conditions when EEI will be more or less reliable than re-computed NPV holds as far as random forecast errors are concerned. In the case of management manipulations, the results depend on whether the investment is believed by management to be worthwhile and on whether the forecast biases are sufficient to turn a poor performance into a good one. The paper concludes with a brief reply to certain key points raised by Grinyer concerning my earlier analysis
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