The effect of accounting standards on Big Bath behavior |
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Authors: | Utz Schäffer Jan-Philipp Lüdtke Diedrich Bremer Matthias Häußler |
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Institution: | (1) WHU – Otto Beisheim School of Management, Institute of Management Accounting and Control, Burgplatz 2, 56179 Vallendar, Germany |
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Abstract: | This paper investigates the influence of accounting standards on systematic earnings understatement. To isolate the effect
of reporting regulations from those of other institutional drivers of earnings management, Holthausen (2003) proposes analyzing
reporting practices in a country undergoing a transition in accounting standards. We respond to this call by analyzing earnings
management practices of large German-listed companies before and after their transitions from German GAAP to IFRS. Specifically,
we focus on Big Bath behavior following Chief Financial Officer turnovers between 1999 and 2006. Our findings provide evidence
of the effect of accounting standards on the existence of this particular earnings understatement pattern. However, while
we detect Big Bath behavior for our sample of German GAAP firms, we find no such indication for those firms reporting under
IFRS. Controlling for alternative explanations such as self-selection bias does not change our findings. We conclude that
accounting standards seem to have a considerable influence on earnings management behavior, independent of managers’ and auditors’
incentives. |
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Keywords: | |
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