The Miller Ratio: Is It Really This Simple?

Abstract

The implication of the study of the Miller Ratio (MR), given the simplicity of its computation, is the possibility of the MR being both a beneficial and easy to use tool for practitioners and regulators to detect for the possibility of earnings management (EM). The previously studied models, particularly the Modified Jones Model (MJM), were not designed to be utilized on a case-by-case basis since they were studied using large samples of firms in an attempt to make generalized statements about the effectiveness of the models. The MR, designed to be utilized on a case-by-case basis, is easily computed. If corporate managers become aware of this simple, easy-to-use tool to detect EM, they may be more cautious about engaging in this activity. Essentially, the MR could assist practitioners and regulators in prioritizing their work load of companies to analyze. It can be another tool in their arsenal to assist them in their regulatory and auditing duties. The simplicity and benefit of the MR is discussed in this study.