ACCT 455 Lecture Notes - Lecture 20: Earnings Management, Financial Statement, Accrual
26 May 2016
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Read the game instructions for next class! (can go over the 6 pages very quickly) Can be bad em (opportunistic) or it can be efficient (avoid violating contracts) Rem involves actual operational decisions (ex. cutting r&d) Pressure on management because market has short term expectations for management. There is no aspect in the financial state(cid:373)e(cid:374)ts that sa(cid:455)s (cid:862)ear(cid:374)i(cid:374)gs (cid:373)a(cid:374)age(cid:373)e(cid:374)t(cid:863) so managers think they can somewhat hide it. 2 types of accruals: non-discretionary (normal) vs. discretionary (abnormal) Heal(cid:455)"s stud(cid:455: accruals are in general negative because of depreciation, holthausen et al, and gaver et al redid the study found different findings, efficient contracting ceos are worried about being fired. If the performance is bad, it can violate debt covenants. Income smoothing (keeps earnings more predictable and persistent: managers are facing more than 1 incentives and some of them contradict each other (incentives are not obvious) Defond and jiambalvo (1994: found similar evidence.
