ARTICLE
The Financial Reporting Consequences of Last Chance Earnings Management
Michael A. Mayberry,
Scott G. Rane,
Michael A. Mayberry
College of Business Fisher School of Accounting, University of Florida Warrington, Gainesville, Florida, USA
Search for more papers by this authorCorresponding Author
Scott G. Rane
College of Business Fisher School of Accounting, University of Florida Warrington, Gainesville, Florida, USA
Correspondence: Scott G. Rane ([email protected])
Search for more papers by this authorMichael A. Mayberry,
Scott G. Rane,
Michael A. Mayberry
College of Business Fisher School of Accounting, University of Florida Warrington, Gainesville, Florida, USA
Search for more papers by this authorCorresponding Author
Scott G. Rane
College of Business Fisher School of Accounting, University of Florida Warrington, Gainesville, Florida, USA
Correspondence: Scott G. Rane ([email protected])
Search for more papers by this authorFirst published: 16 January 2025
Funding: Financial support was provided by the Jack Kramer Term Associate Professorship and from the Fisher School of Accounting.
ABSTRACT
Given its opacity and the timing of its closure, the tax expense represents a theoretically and intuitively plausible mechanism for managers to manipulate earnings to achieve performance benchmarks (i.e., last chance earnings management or LCEM). Although empirical analyses of effective tax rates are consistent with the existence of this behavior, its consequences are unclear. We investigate whether LCEM is associated with lower financial reporting quality. Contrary to our expectations, we fail to find evidence that LCEM is associated with tax-related misstatements, tax-related comment letters, or tax accrual quality with scaled confidence intervals reliably near zero. In cross-sectional tests, we also fail to find a consistent association in subsamples where LCEM is more likely to represent impaired financial reporting quality. Collectively, our results should caution researchers using LCEM as a proxy for impaired financial reporting quality.
Conflicts of Interest
Neither author has any conflicts of interest to disclose.
Open Research
Data Availability Statement
All data used in this study are obtained from publicly available sources and are publicly available.
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