Earnings per Share Growth
Since most executive compensation plans are a function of earnings, managers have an incentive to meet earnings targets. Therefore, companies with a decline in earnings growth are more likely to have incentives to manage earnings (DeFond and Jiambalvo 1991). We adopt two measures of earnings per share growth suggested by Richardson et al. (2002). The first measure is a dummy variable that has a value of 1 when the company has four consecutive quarters of growth at the earliest fiscal year of the original accounting error, and 0 otherwise. The second measure is a count of the number of consecutive quarters of earnings per share growth up to the earliest fiscal year of the original accounting error (going back eight quarters). The two measures were highly correlated (over 90 percent) and therefore, appear to capture the same construct. We report results for the first measure only, which we denote EPSGrowth. The results of all of our tests are similar using the second measure as well.