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When firms manage earnings up (down), the articulation between the income statement and the balance sheet generally forces a simultaneous increase (decrease) in net operating assets. Therefore, under ceteris paribus conditions, upward earnings management results in a contemporaneous increase in profit margin (i.e., operating income divided by sales) and decrease in asset turnover (i.e., sales divided by net operating assets), and downward earnings management results in a contemporaneous decrease in profit margin and increase in asset turnover.
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