Big Baths and Earnings Manipulation – lecture of Derek Oler
Date: 19 February 2025 15:30
Location: Online
In the following semester, three research seminars will be organized by László Péter Lakatos, the Head of the Institute of Accounting and Law and Mohapatra Partha the researcher of the Institute and CIAS. On 19 February 2025 at 15:30 CET, Dr. Derek K. Oler, the professor of Texas Tech University will give a lecture on “Big Baths and Earnings Manipulation“.
Meeting ID: 874 9531 6890
Passcode: 699883
Financial statement manipulation to increase net income often also increases net operating assets (NOA) and when NOA reach larger-than-normal levels, future manipulation is constrained (Barton and Simko, 2002). We investigate a strategy available to manipulating firms when NOA grows conspicuously large: a “big bath” where a significant portion of NOA are written off. This has the effect of significantly decreasing net income in the bath year, generating accounting losses and significantly negative abnormal returns. But by reducing NOA a firm with a prior history of manipulation can continue manipulating net income in future years. This allows the firm to resume the “manipulation life cycle” proposed by Kim and Oler (2024).