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I reexamine the conflicting results in Frank, Lynch, and Rego (2009) and Lennox, Lisowsky, and Pittman (2013). Frank et al. (2009) conclude that firms can manage book income upward and taxable income downward in the same period, implying a positive relation between aggressive book and tax reporting. Lennox et al. (2013) conclude the relation is negative and aggressive book reporting informs users that aggressive tax reporting is less likely. I identify four key differences in the research designs across the two studies, including measures of aggressive book reporting, measures of aggressive tax reporting, sample time periods, and empirical models. I systematically examine whether each of these differences is responsible for the conflicting results by altering the key difference while holding other factors as constant as possible. I find the relation between aggressive book and tax reporting is driven by the measure of aggressive book reporting, as the relation is positive for some subsets of firms and negative for others. Firms accused of financial statement fraud have a negative relation while nonfraud firms exhibit a positive relation. Using discretionary accruals, I also look for, but do not find a “pivot point” in the relation between aggressive book and tax reporting. I provide a better understanding of the relation between aggressive book and tax reporting by identifying research design choices that are responsible for prior results. I show that measures of both discretionary accruals and financial statement fraud are necessary to gain a more complete picture of the relation between aggressive book and tax reporting.

This paper aims to investigate the pricing of discretionary earnings in South Africa. This is a unique setting, as South African listed firms also report mandatory non-GAAP earnings (“headline earnings”).

Results are based on multivariate regression analyses for South African firms that report from 2010 to 2019.

Findings show that the value-relevance of discretionary earnings exceeds that of both GAAP earnings and headline earnings. In addition, placement of discretionary earnings reconciliations communicates information about the decision-usefulness of earnings.

Discretionary earnings remain the most value-relevant earnings measure, despite the divergent decision-useful characteristics offered by headline earnings and GAAP earnings. Therefore, the most decision-useful earnings reflect unique industry or firm characteristics rather than the assurance arising from regulation.

The purpose of this paper is to propose a new measure of earnings management flexibility based on the limits of the allowable set of accruals, prior discretionary accruals used, and the reversal rate of these accruals.

Quarterly financial data from Compustat for the period 1990‐2009 were used to construct the flexibility measure. Then the author examined how well this measure captures flexibility by investigating its effect on a firm's probability of meeting analysts' forecasts.

The results show that this flexibility measure better captures the firm‐specific flexibility than that of Barton and Simko which captures mainly the difference in flexibility across industries. Further, the positive effect of their measure on a firm's probability of meeting/beating analysts' forecasts is not observed in the extended sample period.

The flexibility measure proposed here can assist investors, analysts, or researchers to compare earnings management flexibility across firms in the same industry, which is useful in evaluating the quality of a firm's financial reports, stock picking or credit granting decisions.

This paper contributes to the earnings management literature by incorporating both the variation in flexibility used and that in flexibility limits. Second, evidence in this paper suggests that while financial benefits motivate managers to undertake earnings management, flexibility determines the extent of earnings management they can undertake. Third, this study points out that the unreversed discretionary accruals impose a constraint on the level of discretionary accruals a manager can incur in the current period, and hence have an indirect influence on current reported earnings.

Firms are concerned about earnings per share (EPS) dilution after equity issues. The purpose of this paper is to investigate whether firms manage upward their discretionary accruals around seasoned equity offerings (SEOs) to mitigate the impact of dilution on reported earnings.

The authors employ adjusted discretionary accruals from cash flow statements, normalized by the average common equity, in the multivariate tests.

There is evidence that SEO‐year discretionary accruals are the highest when contemporaneous operating cash flows are the lowest. Moreover, managers react to temporary rather than permanent declines in operating performance. Firms with the highest SEO‐year discretionary accruals experience the strongest improvements in post‐SEO operating cash flows. In addition, investors are not misled by the SEO‐year earnings management. There is no relation between the SEO‐year discretionary accruals and post‐SEO stock performance. Overall, these findings are consistent with the hypothesis that firms manage discretionary accruals around SEOs to mitigate the effect of temporary EPS dilution.

The paper's findings suggest that firms manage discretionary accruals during the SEO year to reduce the temporary negative impact of SEOs on operating performance measures, consistent with the EPS dilution hypothesis. Such earnings management makes earnings smoother and more predictable, improving earnings informativeness. The findings also suggest that misleading earnings management is not a common practice during the SEO year.

This paper adds to the literature questioning the evidence that managers frequently engage in misleading earnings management around corporate events. The authors provide an alternative explanation for earnings management around SEOs.

We examine whether discretionary accruals of firms obtaining substantial external financing can be explained by managerial manipulation or managerial overoptimism. Insider trading patterns and press releases around equity and debt financing suggest that managers are more optimistic about their firms around debt financing. Consistent with earlier studies, we find that discretionary current accruals peak when firms obtain equity financing. However, we also find that discretionary accruals peak when firms obtain debt financing. Moreover, discretionary accruals are higher for firms that rely on debt rather than on equity financing. The results are robust to controlling for firm characteristics, excluding small and distressed firms, and using alternative measures of discretionary accruals. These findings support the hypothesis that managerial overoptimism distorts financial statements of firms obtaining external financing.

The purpose of this paper is to investigate, using data on US manufacturing firms, how and when corporate governance affects managers' decisions to use discretionary accruals and thereby artificially influence company financial reports.

Three‐stage least squares is employed to study the relationship between financial status, corporate governance and financial reporting discretion. The sample spans the years 2001‐2003 during a severe downturn in the US stock market. Financial status is measured with the Altman Z‐score.

A significant difference is found between firms not classified as healthy or failed (i.e. the mid‐range group) and the two extreme categories when examining governance quotient using a well‐known index. A positive relationship is found between discretionary accruals and the governance index. Strong governance appears to reduce the incidence of mid‐range firms engaging in accruals management. The least healthy and the most distressed companies have the weakest relationship with discretionary accruals. By contrast, mid‐range firms are more likely to resort to discretionary accruals.

Non‐executive members of boards of directors are warned to be particularly vigilant about discretionary accruals with firms transitioning between healthy and high‐failure risk.

The relationship between firms' financial health and discretionary accruals reveals an agency problem in credit markets with financially stressed firms. More attention is required on firms whose financial condition is uncertain. Also, it is documented that significant findings of importance to the earnings quality and corporate governance literature by documenting the role of corporate governance on discretionary accruals and financial status.

The use of models for detecting earnings management in the academic literature, using accrual and real manipulation, is commonplace. The purpose of the current study is to compare the power of these models in a United Kingdom (UK) sample of 19,424 firm-year observations during the period 1991–2018. The authors include artificially-induced manipulation of revenues and expenses between zero and ten percent of total assets to random samples of 500 firm-year observations within the full sample. The authors use two alternative samples, one with no reversal of manipulation (sample 1) and one with reversal in the following year (sample 2).

The authors include artificially induced manipulation of revenues and expenses between zero and ten percent of total assets to random samples of 500 firm-year observations within the full sample.

The authors find that real earnings manipulation models have lower power than accrual earnings manipulation models, when manipulating discretionary expenses and revenues. Furthermore, the real earnings manipulation model to detect overproduction has high misspecification, resulting in artificially inflating the power of the model. The authors examine an alternative model to detect discretionary expense manipulation that generates higher power than the Roychowdhury (2006) model. Modified real manipulation models (Srivastava, 2019) are used as robustness and the authors find these to be more misspecified in some cases but less in others. The authors extend the analysis to a setting in which earnings management is known to occur, i.e. around benchmark-beating and find consistent evidence of accrual and some forms of real manipulation in this sample using all models examined.

This study contributes to the literature by providing evidence of misspecification of currently used models to detect real accounts manipulation.

Based on the findings, the authors recommend caution in interpreting any findings when using these models in future research.

The findings address the earnings management literature, guided by the agency theory.

Audit quality studies document that accruals decrease when the audit firm is large, or the audit firm is an industry specialist, or the audit‐client tenure is long. The purpose of this paper is to posit that incentives related to highly‐valued equity mitigate these results, as managers use income increasing accruals to augment earnings.

To test this assertion, the authors regress discretionary accruals on: controls, a highly valued equity indicator variable equal to 1 if the client's lagged price‐to‐earnings ratio is in the highest P/E quintile, indicator variables equal to 1 for alternative measures of audit quality, and interaction terms between the highly valued equity indicator variable and audit quality indicator variables.

Results of tests show positive and statistically significant coefficients for each of the highly‐valued equity‐audit quality interaction terms, suggesting that when a firm is highly valued the accruals' decreasing effect of high quality auditors is reduced.

Beginning with Jensen's article regarding the agency costs of overvalued equity, a stream of research examining factors associated with highly priced firms has developed. The paper extends these findings, as well as the considerable body of audit quality studies, by examining the ability of a high quality auditor to attenuate this result.

Typical organizations comprise members whose behaviors range from the minimum possible to maintain membership, to those discretionarily engaging in job-related behaviors above that expected or required. These discretionary behaviors are beyond the job description and often are not recognized by the formal reward system. Possibly, individuals with high emotional intelligence are more prone to engage in discretionary behaviors. The relationship between the dimensions of emotional intelligence and discretionary citizenship behaviors has not previously been explored. Using samples of nursing and business university professors, this study investigates the relationship between discretionary behaviors of educators and the four branch model of emotional intelligence. Discretionary behaviors comprised a set of traditional organizational citizenship dimensions, and those behaviors beyond the expected unique to higher education. Salovey and Mayer's four branch model was used to assess emotional intelligence. Data were analyzed with correlation analysis and multiple regressions. The regression results indicate that managing emotion (the ability to manage one's emotions and emotional relationships) had the greatest number of significant positive relationships with discretionary behaviors in both samples. Perceiving emotions and understanding emotions produced negative relationships with sportsmanship in the nursing sample. The nursing sample produced more relationships between emotional intelligence and discretionary behaviors than the business faculty sample. Overall results support the idea that emotional intelligence is linked to discretionary citizenship behavior. The study results provide evidence to support the organizational value of emotional intelligence. Also, the results provide ideas for fruitful further research which may hold promise for increasing organizational effectiveness and efficiency.

The purpose of this paper is to examine the relationship between corporate governance and earnings management in US context and provide further insights on the effects of board of directors' characteristics on earnings management.

The paper uses a sample of three groups of US firms; where firms with relatively high negative, firms with relatively high positive, and those with low levels of discretionary accruals in the year 2004 are examined. Descriptive statistics, univariate analysis, multivariate analysis, board of directors' characteristics, and possible relationships between corporate governance variables and earnings management proxy provide the basis for discussion.

Firms with annually elected boards, small size boards, 100 percent independent nominating committees, and 100 percent independent compensation committees have more negative discretionary accruals. However, firms with 75‐90 percent independent board or firms with a board size of between nine and 12 have higher positive discretionary accruals.

Certain board characteristics may be the important factors associated with constraining the propensity of managers to engage in earnings management.

Results are limited by the accuracy of the models applied to isolate discretionary accruals. Additionally, the direction diverse of discretionary accruals may differ with selecting a time series of three or more years as a base for the analysis.

In contrast to prior literature, where board composition is defined as an insiders‐ or outsiders‐controlled board, this paper classifies board composition into seven discrete categories, using the same seven categories employed by Institutional Shareholder Services in evaluating and assigning corporate governance quotient scores to firms. The paper's major contributions to the existing literature are its findings that income‐increasing and income‐decreasing discretionary accruals have a different relationship with corporate governance practices and its expansion of the scope of corporate governance from board independence and audit committee independence to other corporate governance characteristics. This paper provides evidence that supports US regulators' initiatives that stronger corporate governance mechanisms provide greater monitoring of the financial accounting process and may be the important factors in improving the integrity of financial reporting.