Why Firms Just below Thresholds? Earnings Management Constraints and Market Sensitivity to Earnings.

• In Event: Session A: Earnings Management/Disclosure

Abstract

In this study I investigate why there are any firms that report earnings just below an earnings threshold, assuming they have incentives to beat the threshold. Specifically, this study examines whether firms just above and just below two earnings thresholds (earnings levels and earnings changes) use abnormal (discretionary) accruals when they have levels of flexibility and market sensitivity to earnings announcements that encourage earnings management. I find that for firms just around the earnings level and earnings changes thresholds, net operating assets are negatively associated with abnormal accruals. These results hold for an industry-adjusted measure of net operating assets around the earnings levels threshold. I also find that market sensitivity to earnings (as measured by ERC) is not associated with abnormal accruals for firms around the earnings thresholds.

Author

• James C Hansen, University of New Mexico