Detecting Target-Driven Earnings Management Based on the Distribution of Digits

Journal of Business Finance & Accounting, 2017, Vol. 44, No. 1, pp. 63-93; DOI: 10.1111/jbfa.12223 (Creative Commons Attribution Non-Commercial License)

31 Pages Posted: 12 Oct 2016 Last revised: 9 Oct 2017

See all articles by Robert Ullmann

Robert Ullmann

University of Augsburg; Norwegian Center for Taxation

Christoph Watrin

University of Muenster - Accounting Center

Multiple version iconThere are 2 versions of this paper

Date Written: September 29, 2016

Abstract

We present a novel research design to detect target-driven earnings management in accounting data. As a particular concern in this line of research, information about the exact earnings target value of a given firm is often not available. We therefore develop an empirical strategy that does not require such information. To this end, we rely on the concept of the distribution of digits rather than the distribution of the earnings metric itself. We then theoretically derive that the mean of the distribution of digits, in particular, exhibits a specific pattern around the earnings target that can be exploited to investigate target-driven earnings management. This pattern arises regardless of the distribution of digits that obtains in unmanaged data. We extensively test our theoretical predictions using both simulative and archival data.

Keywords: Distribution of Digits, Target-Driven Earnings Management, Benford’s Law

JEL Classification: C21, C22, C23, M41

Suggested Citation

Ullmann, Robert and Watrin, Christoph, Detecting Target-Driven Earnings Management Based on the Distribution of Digits (September 29, 2016). Journal of Business Finance & Accounting, 2017, Vol. 44, No. 1, pp. 63-93; DOI: 10.1111/jbfa.12223 (Creative Commons Attribution Non-Commercial License), Available at SSRN: https://ssrn.com/abstract=2850487

Robert Ullmann (Contact Author)

University of Augsburg ( email )

Universitätsstr. 16
Augsburg, 86159
Germany

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/ullmann/Team/Prof_-Dr_-Robert-Ullmann/

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

Christoph Watrin

University of Muenster - Accounting Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

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