A Diagnostic for Earnings Management Using Changes in Asset Turnover and Profit Margin*

• 成果类型: Article
• 署名作者: Jansen, Ivo Ph.; Ramnath, Sundaresh; Yohn, Teri Lombardi
• 署名单位: Rutgers University System; Rutgers University Camden; University of Miami; Indiana University System; Indiana University Bloomington
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/j.1911-3846.2011.01093.x
• 发表日期: 2012
• 页码: 221-+
• 关键词: return

摘要

We propose and test a new diagnostic of earnings management that is based on contemporaneous, directionally opposite changes in two fundamental accounting ratios: asset turnover (ATO) and profit margin (PM). The logic for this diagnostic follows from the articulation of the income statement and balance sheet, which under fairly general conditions forces ATO and PM to move in opposite directions when firms manage earnings. We therefore hypothesize that contemporaneous increases in PM and decreases in ATO signal upward earnings management, and contemporaneous decreases in PM and increases in ATO signal downward earnings management. Given that earnings management is not directly observable, we validate the ATO/PM diagnostic by assessing whether it is predictive of outcomes and consequences generally associated with earnings management. Specifically, we show that the diagnostic is useful for identifying firms that meet or just beat analyst forecasts, report extreme earnings surprises, subsequently restate earnings, and incur reversals in year-ahead firm performance. We find that the ATO/PM diagnostic has significantly greater discriminating ability for identifying firms that meet or beat expectations, report extreme earnings surprises, and subsequently restate earnings than performance-adjusted abnormal accruals, a widely accepted proxy for earnings management.