Audit Quality and the Trade-Off between Accretive Stock Repurchases and Accrual-Based Earnings Management

We examine whether audit quality affects the trade-off between accrual-based and real earnings management. We hypothesize that firms motivated to manage earnings per share (EPS) to meet or beat consensus analysts' forecasts are more likely to engage in accretive stock repurchases (a form of rea...

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Bibliographic Details
Published in:The Accounting review 2012-11, Vol.87 (6), p.1861-1884
Main Authors: Burnett, Brian M., Cripe, Bradrick M., Martin, Gregory W., McAllister, Brian P.
Format: Article
Language:English
Subjects:
Analytical forecasting
Auditing
Audits
Cash
Consensus
Creative accounting
Earnings
Earnings management
Earnings per share
Financial audits
Industrial market
Management audits
Modeling
Quarterly estimates
Repurchase
Repurchasing
Stock buyback
Stock management
Stock returns
Studies
Trade-off
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Summary:We examine whether audit quality affects the trade-off between accrual-based and real earnings management. We hypothesize that firms motivated to manage earnings per share (EPS) to meet or beat consensus analysts' forecasts are more likely to engage in accretive stock repurchases (a form of real earnings management) when their ability to manage earnings through accruals is constrained by high audit quality. We find that firms with high audit quality are more likely to use accretive stock repurchases and less likely to use accrual-based earnings management to meet or beat consensus analysts' forecasts. Our results are robust to various controls for endogeneity concerns.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr-50230