A Study of 'ex post' Benchmark Beating and 'ex ante' Earnings Management Condition on Pre-managed Earnings

Abstract

This study investigates benchmark beating behavior and the extent to which benchmark beating behavior is caused by earnings management. Using a large sample of Australian data with 4,746 observations from 2000 to 2006, and the conjunction of distribution method and accruals approach, we find when pre-managed earnings below zero (prior year's earnings), firms are more likely to exercise positive discretionary accruals to inflate earnings to beat ex post benchmarks. This will be of interest to regulators as an effective way to detect earnings management may be pronounced if regulators can identify ex ante condition under which firms seek to manipulate earnings.