2007/09/28 by PAUL HRIBAR, Paul Hribar, D. CRAIG NICHOLS +1 · 662 citations
Business, Management and Accounting · Economics, Econometrics and Finance · Mathematics · #Accounting #Accrual #Auditing, Earnings Management, Governance #Earnings #Earnings management #Earnings quality #Econometrics #Economics #Financial Reporting and Valuation Research #Law, Economics, and Judicial Systems #Mathematics #Null hypothesis #Statistics #Value (mathematics) #Variance (accounting) #Volatility (finance)
paper · doi:10.1111/j.1475-679x.2007.00259.x
published in Journal of Accounting Research 45(5), 1017-1053 (Wiley)
openalex publication_date 2007/09/28 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/05
ABSTRACT This paper examines the implications of using the absolute value of discretionary accruals when testing for earnings management. First, we analytically develop the mean and variance of the distribution of absolute discretionary accruals, and show that the expected value is an increasing function of the variance in the underlying error term from the first‐stage discretionary accrual estimation model. Second, we highlight several firm characteristics that are related to the error variance in discretionary accrual estimation models. Using simulations, we show that correlation between the earnings management partitioning variable and these firm characteristics leads to an overrejection of the null hypothesis of no earnings management. Third, we provide research design suggestions to help researchers mitigate the potential bias arising from the use of unsigned measures of earnings management. Using these suggestions, we replicate a recent study, and demonstrate that the inferences change after controlling for operating volatility.