Prior research documents income-decreasing earnings management in the situation when true earnings exceed the targets by a substantial amount and in the situation when true earnings fall far below the targets and acco...Prior research documents income-decreasing earnings management in the situation when true earnings exceed the targets by a substantial amount and in the situation when true earnings fall far below the targets and accounting reserves are not sufficient to reach the targets. These two situations are well-known as cookie jar and big bath earnings management. True earnings are defined as pre-managed earnings （PMEs） and are measured as reported earnings minus adjusted discretionary accruals （DAs）. However, the use of PMEs can induce a spurious association between earnings management and PMEs above or below the benchmarks, which are known as the backing-out problem （Lim ＆ Lustgarten, 2002）. This study reexamines the cookie jar and big bath type of earnings management and addresses in particular the issue of backing-out problem. By using an Australian sample of 3,326 observations covering all listed firms in the Australian Securities Exchange （ASX） for a period from 1999 to 2006, this study suggests that the finding of cookie jar accounting is not simply a consequence of the backing-out problem. The results show that an income-decreasing earnings management occurs when PMEs are well above the targets. This is consistent with the first argument of cookie jar accounting--Finns reduce current earnings in order to save some income for the future. However, the results do not support the big bath accounting theory.展开更多
文摘Prior research documents income-decreasing earnings management in the situation when true earnings exceed the targets by a substantial amount and in the situation when true earnings fall far below the targets and accounting reserves are not sufficient to reach the targets. These two situations are well-known as cookie jar and big bath earnings management. True earnings are defined as pre-managed earnings （PMEs） and are measured as reported earnings minus adjusted discretionary accruals （DAs）. However, the use of PMEs can induce a spurious association between earnings management and PMEs above or below the benchmarks, which are known as the backing-out problem （Lim ＆ Lustgarten, 2002）. This study reexamines the cookie jar and big bath type of earnings management and addresses in particular the issue of backing-out problem. By using an Australian sample of 3,326 observations covering all listed firms in the Australian Securities Exchange （ASX） for a period from 1999 to 2006, this study suggests that the finding of cookie jar accounting is not simply a consequence of the backing-out problem. The results show that an income-decreasing earnings management occurs when PMEs are well above the targets. This is consistent with the first argument of cookie jar accounting--Finns reduce current earnings in order to save some income for the future. However, the results do not support the big bath accounting theory.
