Abstract

Discretionary accruals models, which have been mostly used to measure magnitude of earnings management done by managers, might have overstated income manipulation and resulted in an increase in error type alpha in empirical studies. Emphasizing on detecting revenue management instead of earnings management, this study employs a model which provides an unbiased estimation of discretionary revenues, as an alternative proxy for earnings management. The findings, which are obtained by regression of a panel data sample including 860 firm-year observations, documents that (1) the stock market prices the information contained in discretionary revenues and (2) stock prices negatively response to the discretionary revenues. The findings suggest that the discretionary revenues have incremental information content, and consistent with opportunistic earnings management explanation manager’s engagement in income manipulation is not a wealth-maximizing approach which may benefit shareholders. Furthermore, the results of a comparison of two non-nested models, revenue and accrual model, using AIC and Cox’s Z test shows that the alternative proxy, discretionary revenues, gives a more realistic and powerful prediction of firm value.