Inventory Changes and Future Returns

Test of the first hypothesis intends to answer the
question whether accrual earnings management
conducted by companies in Germany is higher than
accrual earnings management conducted by companies
in the U.S. Test of the first hypothesis is carried out by
comparing mean value of discretionary accrual (proxy
of accrual earnings management) between companies
in Germany with companies cited in the U.S.
Table 4 shows that discretionary accrual in Germany
(0.4887) is higher than discretionary accrual in the U.S.
(0.1084). The t-test result showed the t value is -13,942
with value of p=0.000. This indicates that in the periods
of 2004-2007, accrual earnings management between
companies in Germany is different than companies in
The U.S. The discretionary accrual in Germany is higher
than discretionary accrual in The U.S. Therefore, the
first hypothesis which states that accrual earnings
management on companies in Germany is higher than
accrual earnings management in the US is supported
at the conventional level (1 %).
The result from the first hypothesis probably
indicates that approach of the rule-based accounting
standards used by the US is capable of reducing the
practices of accrual earnings management. This matter
is reflected from the lower value of companies’ accrual
discretionary in The U.S. as compared to companies in
Germany that used the principle-based accounting
standards approach. The approach of rule-based
accounting standards has made accounting standards
in the U.S. structured strictly and decreases
opportunities of companies to conduct accrual
earnings management. This supports the first
hypothesis and is consistent with the results by
Demski (2004), Ewert and Wagenhofer (2005), Cohen
et al. (2008) and Yu (2008).