The association of earnings management with current returns, current market values, future returns, executive compensation and the likelihood of being a target of 10b-5 litigation

Corporations have a fair degree of flexibility in determining their reported earnings. They may use this flexibility to reduce taxes, to increase executives' bonuses, to smooth earnings or to achieve other objectives. Researchers typically use the Jones (1991) model to estimate the discretionary portion of accruals. This dissertation contains five essays that include empirical analysis related to discretionary accruals.;The first two essays compare the efficacy of estimating discretionary behavior as discretionary total accruals or discretionary current accruals. The first essay analyzes the relationship between components of earnings and current returns and current market values. A better measure of earnings management should produce earnings components with different valuation consequences. The second essay explores the univariate time series properties of several measures of discretionary accruals. If a measure accurately captures discretion exercised in reporting earnings in a particular year then the level of the measure should reverse in subsequent years. The results from both essays suggest that discretionary current accruals provide a more accurate measure of earnings management than discretionary total accruals.;The third essay investigates whether future returns are associated with discretionary accruals. This could occur if the market fails to identify or properly value the discretionary portion of accruals. Corporations with high nondiscretionary current accruals experience substantially more favorable future returns than firms with high discretionary current accruals.;The fourth essay analyzes whether components of earnings are differentially related with CEO compensation. Nondiscretionary current accruals have a higher coefficient than discretionary current accruals in regressions of compensation on earnings components.;The fifth essay analyzes whether discretionary current accruals and five other factors influence 10b-5 litigation risk. The other factors are trading by insiders, the issuance of additional equity, the type of announcement that came at the end of the potential class period, the existence of a Securities and Exchange Commission enforcement action against the firm or its employees, and the restatement of past accounting results. This essay tests whether each factor has an incremental impact on litigation risk after controlling for stock market characteristics. Discretionary current accruals in the previous year are not associated with litigation risk.