Use of benchmarks in predicting earnings management?

• Published in: Accounting and finance (Parkville) Vol. 57; no. 1; pp. 239 - 260
• Main Authors: Kent, Richard, Routledge, James, McPherson, Karen
• Format: Journal Article
• Language: English
• Published: Clayton Blackwell Publishing Ltd 01-03-2017
• Subjects: Benchmark beating; Benchmarks; Earnings; Earnings management; Earnings quality
• ISSN: 0810-5391; 1467-629X
• DOI: 10.1111/acfi.12130

This study conducts multiple approaches to identify whether earnings benchmarks are an indicator for earnings management within the Australian market. We investigate firms reporting small positive earnings and small positive earnings changes, referred to as benchmark beaters. Accrual quality models, earnings distributions and earnings persistence measures are applied to identify whether benchmark beating firms are manipulating earnings. Our findings suggest that the small positive earnings benchmark attracts earnings managers. However, we do not identify any evidence to indicate that the positive earnings change benchmark is a signal for earnings management.