@article{2996bff29a944dfbaeb34050e90d6a86,
title = "Empirical tests of budget ratcheting and its effect on managers' discretionary accrual choices",
abstract = "In this paper, we investigate whether budgets ratchet. Using business-unit data from a large multinational corporation, we find evidence consistent with ratcheting where favorable budget variances result in performance budget increases that are larger than decreases associated with unfavorable variances of the same magnitude. We argue that under ratcheting, the cost of reporting positive transitory earnings surprises outweigh the short-term benefits of the current-period bonus. Consequently, we hypothesize that managers make income-decreasing discretionary accruals to offset transitory earnings surprises beyond the level expected under fixed budgets. Using a proxy for transitory earnings surprise, we find evidence consistent with this hypothesis.",
keywords = "Bonus plans, Earnings management, Performance budgets, Ratchet effect, Ratchet principle",
author = "Leone, {Andrew J.} and Steve Rock",
note = "Funding Information: We thank Ray Ball, Bruce Billings, Jim Brickley, John Core, Liz Demers, David Guenther, Harry Evans, Steve Huddart, Scott Keating, S.P. Kothari, Ludger Hentschel, Jim Linck, Tom Lys, Bob Magee, Ron Mannino, Nathalie Moyen, D.J. Nanda, Paul Oyer, Frank Selto, Phil Shane, Cliff Smith, Naomi Soderstrom, Nathan Stuart, Jake Thomas, Mike Willenborg, Ross Watts, Sally Widener, and especially Amy Hutton (the referee) and Jerry Zimmerman (the editor) for helpful comments on previous versions of the paper. We also thank workshop participants at Carnegie Mellon, Chicago, Colorado, Columbia, Dortmouth, the 1999 Management Accounting Research Conference, the Harvard Business School Financial Decisions and Control Workshop, Michigan, MIT, Northwestern and Rochester. We are grateful to Flora Guidry for sharing the data and for discussions on the topic. Andrew Leone received financial support from the Bradley Policy Research Center at the Simon School and the John M. Olin Foundation. Copyright: Copyright 2008 Elsevier B.V., All rights reserved.",
year = "2002",
doi = "10.1016/S0165-4101(01)00044-1",
language = "English (US)",
volume = "33",
pages = "43--67",
journal = "Journal of Accounting and Economics",
issn = "0165-4101",
publisher = "Elsevier B.V.",
number = "1",
}