| The study of earnings management requires a solid understanding on the stochastic properties of accounting accruals. Although the literature has explored in great depth on the mean properties of accounting accruals, few researchers have paid attention to the variance properties. The purpose of this thesis is to study how the variance of accounting accruals differs across firms and across time, what firm characteristics and attributes of disclosure environment affect the accrual variability, what implications the variance study has for the growing literature on earnings management, and how the variance approach can be applied to address the issue of intra-year timing of earnings management, and more generally, the issue of the pervasiveness of earnings management.; Building upon the Jones (1991) Model framework, this thesis provides a more complete picture on the stochastic properties of accounting accruals and broadens the scope of earnings management issues in academic studies. In this generalized framework, the conditional mean of accounting accruals is determined by the economic circumstances and the accounting requirements of GAAP, while the conditional variance is determined by the structural characteristics of the firms and the disclosure environment of the market as well as the manager's opportunistic behavior.; The first part of the thesis provides the foundation of the variance study by examining if there is any differing variability of discretionary accruals and what economic factors are associated with the variability. Based on the broad database of Compustat, significant heteroscedasticity of discretionary accruals is found. In particular, the variability of discretionary accruals is decreasing in firm size and leverage measured by long-term debt/assets. It increases with the variability of cash flows and leverage measured by total debt/assets. Significant industry differences and interesting temporal patterns are identified.; The second part of the thesis applies the variance approach to examine the intra-year timing of earnings management. Discretionary accruals are found to be significantly more volatile in the fourth quarter than in other quarters. Various checks indicate the higher variability is driven more by earnings management than by mechanical year-end closing adjustments. The results provide indirect evidence on the pervasiveness of earnings management. |
