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Environmental Uncertainty and Managers’ Use of Discretionary Accruals
Dipankar Ghosh, University of Oklahoma
Lori Mason - Olsen, North Dakota State University
ABSTRACT. Environmental uncertainty (EU) induces more variability in reported earnings which managers have incentives to reduce. GAAP’s flexibility allows managers the means to do this via exercising discretion in recognizing accruals. This is akin to the flexibility accorded to managers via budgetary and organizational slack. Thus, we draw upon prior research on slack and EU to examine the relation between managers’ use of discretionary accruals (DA) and EU. First, we find a positive association between EU and economic earnings variability, and those firms in high EU use DA more. Next, we show that the variability of reported earnings is less than the variability of economic (unmanaged) earnings, and this difference is greater for firms in high EU. Last, we find a positive relation between absolute DA and the reduction in variability from economic to reported earnings. Overall, evidence show managers use DA to reduce the variability in reported earnings more when firms operate in high EU.
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