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Answer: Earnings manipulators are aware of the power of the model to screen possible cases of earnings manipulation
The correct answer is B. The Beneish model's predictive power is declining because earnings manipulators have become aware of the model's ability to detect manipulation. As manipulators learn about the model's detection mechanisms, they adapt their manipulation techniques to avoid triggering the model's red flags, thereby reducing the model's effectiveness over time. This phenomenon is known as the "learning effect" or "model decay" where detection models lose their predictive power as subjects learn to circumvent them.
Author: LeetQuiz Editorial Team
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Which of the following best explains why the predictive power of the Beneish model is declining over time?
A
The model using accounting numbers is a partial representation of economic reality
B
Earnings manipulators are aware of the power of the model to screen possible cases of earnings manipulation
C
Financial models based on accounting numbers are only capable of establishing associations between variables
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