Discretionary accounting choices and the predictive ability of accruals with respect to future cash flows

Brad A. Badertscher, Daniel W. Collins and Thomas Z. Lys

Journal of Accounting and Economics, 2012, vol. 53, issue 1, 330-352

Abstract: Using a sample of restatement firms and a meet-or-beat model to classify firms as making discretionary accounting choices for opportunistic meet-or-beat (OP-MB) reasons, we show that originally reported earnings and accrual components are less predictive of future cash flows relative to the restated numbers. We find the opposite is true for firms classified as making discretionary accounting choices for non-OP-MB reasons. We consider a number of competing explanations for these latter results. Our findings are most consistent with the informational hypothesis, weakly consistent with conservative-motivated efficient contracting hypotheses, but inconsistent with opportunistic contracting and misapplication/errors of GAAP explanations.

Keywords: Discretionary accruals; Earnings management; Restatements; Cash flows; Predictive ability of accruals (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (31)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:53:y:2012:i:1:p:330-352

DOI: 10.1016/j.jacceco.2011.11.003

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Journal of Accounting and Economics is currently edited by J. L. Zimmerman, S. P. Kothari, T. Z. Lys and R. L. Watts

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