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

Brad A. Badertscher*, Daniel W. Collins, Thomas Lys

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

47 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)330-352
Number of pages23
JournalJournal of Accounting and Economics
Volume53
Issue number1-2
DOIs
StatePublished - Feb 1 2012

Keywords

  • Cash flows
  • Discretionary accruals
  • Earnings management
  • Predictive ability of accruals
  • Restatements

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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