Earnings and discretionary accruals

Earnings management is a concerning issue for investors and regulators as it reduces the informativeness of financial reporting. Discretionary accruals are acknowledged to be proxies for earnings management. The study is conducted on firms in the US markets from 1975 to 2012, and the quantitative methodology is applied. Earnings management is revealed by an abnormal level of accruals relative to the firm's business activity. This paper investigates the earnings pattern and earnings management of the firm based on different models of discretionary accruals as proxies for earnings management: modified Jones, performance‐matched discretionary, and growth‐based cash flow discretionary accruals. Using a novel approach to detect the earnings pattern of firms, we find that firms in the negative earnings group are more involved in earnings management activity.