Krull (2004) finds evidence that firms manage earnings through the permanently reinvested earnings designation using the backing-out methodology. However, Lim and Lustgarten (2002) demonstrate that studies using the backing-out methodology may be subject to Type I errors. In this study, I demonstrate that the Krull measure of pre-managed earnings is susceptible to Type I errors. I then introduce an alternative measure based on Gupta et al. (2016), and I find no evidence of earnings management through PRE using the Gupta measure of pre-managed earnings in the broad cross-section. These results indicate that initial conclusions in Krull (2004) regarding the pervasiveness of earnings management through permanently reinvested earnings may be overstated. However, among a sample of firms with the greatest ability to manage earnings through PRE, I find evidence of upward earnings management through PRE using both the Krull and Gupta measures.

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