Earnings Management Relations of Accruals Components: A Multi-Period Setting

Abstract

A dynamic steady-state model of financial reporting subject to ongoing earnings management strategies is presented. We show that, even in the absence of researcher measurement error, discretionary accruals and non-discretionary accruals are always negatively correlated. The negative correlation becomes weaker (less negative) as earnings persistence increases and, counter-intuitively, as the ability to engage in earnings management increases. Our theoretical results provide building blocks for improving the technology for empirical investigation, which we employ to provide an empirical estimation technique to improve the technology for investigating earnings management using discretionary accruals. We find empirical evidence of strategic multi-period earnings management, in general. And, our accruals model compares favorably against other models.