if reversals take place over quarters, we assume that 1/nth of the total reversal occurs each quarter from 1 to n n, following the earnings management quarter. Finally, we assume that the following proportion of the original earnings management reverses during the specified reversal horizon: 100%, 50%, and 30%. We mix these seeded quarters and reversal quarters with the remaining sample of firm-quarters and carry out the following regression: (T5.1) is a dummy variable that takes the value one for the earnings management quarter and zero otherwise. PART Similarly, are dummy variables that take the value one for each of the next four quarters and PARTR1 PARTR4 – zero otherwise. The subscripts and denote the firm and the quarter. The usual model terms are the same as i t included in equations (T2.1) and (T2.2) of Table 2 for Jones and Mod-Jones(C) models. We repeat the procedure 250 times and record the frequency with which the null hypothesis of can be rejected in favor of the alternate hypothesis of . N = 600 N = 1000 N = 2000 33.6 35.6 63.2 with ROA+SG matching mean test – 37.6 42.8 75.6 with ROA+SG matching median test – 18.0 28.0 39.6 with reversals methodology 100% reversal – 11.2 16.8 24.0 Jones with reversals methodology 50% reversal – 8.8 13.6 19.2 Jones with reversals methodology 30% reversal – 32.0 37.2 63.2 Mod-Jones(C) with ROA+SG matching mean test – 38.8 44.4 75.6 Mod-Jones(C) with ROA+SG matching median test – 22.0 28.8 43.6 Mod-Jones(C) with reversals methodology 100% reversal – 12.4 20.8 27.6 Mod-Jones(C) with reversals methodology 50% reversal – 10.8 16.8 23.6 Mod-Jones(C) with reversals methodology 30% reversal –
if reversals take place over n quarters, we assume that 1/nth of the total reversal occurs each quarter from 1 to n, following the earnings management quarter. Finally, we assume that the following proportion of the original earnings management reverses during the specified reversal horizon: 100%, 50%, and 30%. We mix these seeded quarters and reversal quarters with the remaining sample of firm-quarters and carry out the following regression: (T5.1) PART is a dummy variable that takes the value one for the earnings management quarter and zero otherwise. Similarly, PARTR1 – PARTR4 are dummy variables that take the value one for each of the next four quarters and zero otherwise. The subscripts i and t denote the firm and the quarter. The usual model terms are the same as included in equations (T2.1) and (T2.2) of Table 2 for Jones and Mod-Jones(C) models. We repeat the procedure 250 times and record the frequency with which the null hypothesis of can be rejected in favor of the alternate hypothesis of . N = 600 N = 1000 N = 2000 with ROA+SG matching – mean test 33.6 35.6 63.2 with ROA+SG matching – median test 37.6 42.8 75.6 with reversals methodology – 100% reversal 18.0 28.0 39.6 Jones with reversals methodology – 50% reversal 11.2 16.8 24.0 Jones with reversals methodology – 30% reversal 8.8 13.6 19.2 Mod-Jones(C) with ROA+SG matching – mean test 32.0 37.2 63.2 Mod-Jones(C) with ROA+SG matching – median test 38.8 44.4 75.6 Mod-Jones(C) with reversals methodology – 100% reversal 22.0 28.8 43.6 Mod-Jones(C) with reversals methodology – 50% reversal 12.4 20.8 27.6 Mod-Jones(C) with reversals methodology – 30% reversal 10.8 16.8 23.6