A Reexamination of Earnings Management through Permanently Reinvested Earnings

Krull (2004) finds evidence that firms manage earnings through the permanently reinvested earnings (PRE) designation using the backing-out methodology. However, Lim and Lustgarten (2002) demonstrate that studies using the backing-out methodology may be subject to Type I errors. In this study, I demo...

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Bibliographic Details
Published in:The Journal of the American Taxation Association 2020-09, Vol.42 (2), p.85-115
Main Author: Mathis, Mollie E.
Format: Article
Language:English
Subjects:
Accounting
Earnings
Earnings management
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Summary:Krull (2004) finds evidence that firms manage earnings through the permanently reinvested earnings (PRE) designation using the backing-out methodology. However, Lim and Lustgarten (2002) demonstrate that studies using the backing-out methodology may be subject to Type I errors. In this study, I demonstrate that the Krull measure of pre-managed earnings is susceptible to Type I errors. I then introduce an alternative measure based on Gupta, Laux, and Lynch (2016), and I find no evidence of earnings management through PRE using the Gupta measure of pre-managed earnings in the cross-section. However, among a sample of firms with the greatest ability to manage earnings through PRE, I find evidence of upward earnings management through PRE using both the Krull and Gupta measures.
ISSN:0198-9073
1558-8017
DOI:10.2308/jata-18-009