Moreover, earnings management proxies should be particularly responsive to the use of discretion and firms’ reporting incentives, making our tests more powerful. Finally, we can draw on prior research in constructing several measures of earnings management (., Healy and Wahlen, 1999; Dechow and Skinner, 2000). Following Leuz et al. (2003), we compute four different proxies capturing a wide range of earnings management activities: ., the tendency of firms to avoid small losses, the magnitude of total accruals, the smoothness of earnings relative to cash flows and the correlation of accounting accruals and operating cash flows. We recognize that these proxies are not perfect and indicate earnings management only in.
