PPEt = gross property, plant and equipment in year scaled by total assets at t, t-1; At-1 = total assets at t-1; a1, a2, a3 = firm-specific parameters; This modified version of the Jones (1991) model assumes that the changes in the sales result from the use of earnings management. The Industry Model The Industry Model was used by Dechow and Sloan (1991), and in addition was considered by Dechow et Al. (1995). This model, just like the original Jones model, relaxes the premise that the non-discretionary accruals would be constant over time. In addition, it assumes that variations in the factors that affect the non-discretionary accruals are standard for firms in the same industry. Consequently, the Industry Model is: NDAt = + γ1 γ2 median(TAt) (7) Where: median(TAt) = the median value of total accruals scaled by lagged assets for all non-sample firms in the same 2-digit SIC code; = specific parameters estimated using OLS on the observations in the estimation γ1, γ2 period; Regarding the Industry Model, as Dechow et Al. (1995) presented one problem exists: “If changes in non-discretionary accruals largely reflect responses to changes in firm-specific circumstances, then the Industry Model will not extract all non-discretionary accruals from the discretionary accrual . proxy” Healy The Model Introduced by Healy (1985), this approach for detecting and measuring earnings model’s management is by comparing mean total accruals scaled by lagged total assets across the earnings management partitioning variable. The Healy Model is: = / T (8) NDAτ ∑ TAt Where: NDA = estimated nondiscretionary accruals;
PPEt = gross property, plant and equipment in year t, scaled by total assets at t-1; At-1 = total assets at t-1; a1, a2, a3 = firm-specific parameters; This modified version of the Jones (1991) model assumes that the changes in the sales result from the use of earnings management. The Industry Model The Industry Model was used by Dechow and Sloan (1991), and in addition was considered by Dechow et Al. (1995). This model, just like the original Jones model, relaxes the premise that the non-discretionary accruals would be constant over time. In addition, it assumes that variations in the factors that affect the non-discretionary accruals are standard for firms in the same industry. Consequently, the Industry Model is: NDAt = γ1 + γ2 median(TAt) (7) Where: median(TAt) = the median value of total accruals scaled by lagged assets for all non-sample firms in the same 2-digit SIC code; γ1, γ2 = specific parameters estimated using OLS on the observations in the estimation period; Regarding the Industry Model, as Dechow et Al. (1995) presented one problem exists: “If changes in non-discretionary accruals largely reflect responses to changes in firm-specific circumstances, then the Industry Model will not extract all non-discretionary accruals from the discretionary accrual proxy” . The Healy Model Introduced by Healy (1985), this model’s approach for detecting and measuring earnings management is by comparing mean total accruals scaled by lagged total assets across the earnings management partitioning variable. The Healy Model is: NDAτ = ∑ TAt / T (8) Where: NDA = estimated nondiscretionary accruals;