Hierarchy of earnings thresholds based on discretionary accruals

Barua, Abhijit and Kim, Jung Hoon and Yi, Sheng,(2019), Hierarchy of earnings thresholds based on discretionary accruals. , Advances in Accounting, UNSPECIFIED

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Prior studies identify hierarchies of earnings thresholds based on distributions of earnings (e.g., Degeorge et al., 1999) and survey opinions of CFOs (Graham, Harvey, & Rajgopal, 2005). We complement extant literature by investigating a threshold hierarchy in the context of accounting discretion exercised by managers. We examine the relative extent of discretionary accruals used to achieve three earnings thresholds—avoiding losses, avoiding earnings declines, and avoiding negative earnings surprises. Our empirical findings suggest that managers are likely to use the largest amount of discretionary accruals to avoid earnings declines, and the least amount of discretionary accruals to avoid negative earnings surprises. Thus, this study identifies the hierarchy of the earnings thresholds based on accounting discretion used in financial reporting. We also find that the hierarchy remains stable over the last two decades during our sample period. Then, we provide several explanations for why managers are likely to exercise more accounting discretion to avoid earnings declines. These explanations include earnings smoothing, reduction of stock returns volatility, and signaling of future growth potential. Overall, this study provides new insights into accruals management behavior.
Keywords : Hierarchy of earnings thresholds Discretionary accruals Earnings smoothing Stock returns volatility Future growth potentials, UNSPECIFIED
Journal or Publication Title: Advances in Accounting
Volume: 44
Item Type: Article
Subjects: Akuntansi
Depositing User: Users 8 not found.
Date Deposited: 23 Dec 2019 07:49
Last Modified: 23 Dec 2019 07:49
URI: https://repofeb.undip.ac.id/id/eprint/732

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