Our final earningsmanagement measure uses an alternative
approach to examining the correlation between accruals
and cash flows. In our alternative approach we regress
accruals on cash flows after controlling for firm size, growth,
equity issues, leverage, debt issues, sales turnover, and the
presence of a BigN auditor to provide an estimate of the correlation
between accruals and cash flows. Similar to the
Spearman correlation coefficients discussed in the preceding
paragraphs, we expect that firms with more smoothing
will have more negative correlations between cash flows
and accruals. We therefore use an indicator variable interacted
with cash flows to capture the differential correlation
for the relevant period before and after each accounting
standard. A positive coefficient for the interaction term,
which represents less negative correlation between accruals
and cash flows after implementation of the accounting standards,
is consistent with less earnings management through
less smoothing (improved accounting quality).