Real Earnings Management and Subsequent Operating Performance

The IUP Journal of Operations Management, Vol. XV, No. 4, November 2016, pp. 7-32

Posted: 17 Nov 2017

See all articles by Denise Leggett

Denise Leggett

University of Alabama

Linda M. Parsons

University of Alabama - Culverhouse School of Accountancy

Austin L. Reitenga

University of Alabama

Date Written: November 15, 2017

Abstract

Real Earnings Management (REM) is the manipulation of business activities to meet an earning’s threshold. Despite concern that REM activities create real economic costs, research on the relation between REM and subsequent operating performance is inconclusive. In this paper, a two-firm-level method of estimating abnormal discretionary expenditures is developed and a more proactive method of identifying REM activity is implemented. Using firm-level estimates of abnormal expenditures, strong evidence of REM negatively related to subsequent period return on assets and cash flows from operations is found. The results suggest that the inconclusive results in prior research may be in part due to estimating abnormal expenditures using industry-level models.

Suggested Citation

Leggett, Denise and Parsons, Linda M. and Reitenga, Austin L., Real Earnings Management and Subsequent Operating Performance (November 15, 2017). The IUP Journal of Operations Management, Vol. XV, No. 4, November 2016, pp. 7-32, Available at SSRN: https://ssrn.com/abstract=3071456

Denise Leggett (Contact Author)

University of Alabama ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

Linda M. Parsons

University of Alabama - Culverhouse School of Accountancy ( email )

101 Paul W. Bryant Dr.
Box 870382
Tuscaloosa, AL 35487
United States

Austin L. Reitenga

University of Alabama ( email )

Culverhouse College of Commerce
Box 870223
Tuscaloosa, AL 78249
United States
205-348-5780 (Phone)

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