Abstract
This paper analyzes critically the early and recent literature on earnings management. I summarize the motivations and estimation models for accrual earnings management and real earnings management. Specifically, I focus on estimation models in real earnings management which are developed by Vorst (2016), extending the original sample period. Cross-sectional analysis reveals that earnings management is detectable purely based on companies’ financial data. The analyses are of interest to investors, regulators, and researchers with respect to the identification and consequences of earnings management.
Highlights
Earnings management occurs when managers deliberately alter firms’ operations or make accounting choice for accruals, which are reflected as real earnings management and accrual earnings management, respectively
Earnings management can be deemed as a means of profit manipulation
It is important for investors and other stakeholders to recognize whether managers engage in earnings management
Summary
Earnings management occurs when managers deliberately alter firms’ operations or make accounting choice for accruals, which are reflected as real earnings management and accrual earnings management, respectively. Earnings management can be influential, even mislead some stakeholders (Healy and Wahlen 1999). Earnings management can be deemed as a means of profit manipulation. The objective of this paper is to analyze the earnings management critically by focusing on three main aspects in this topic. The first aspect is about seven possible motivations for earnings management and the relationship between each motivation and manager’s behavior in firms. I follow Roychowdhury (2006) and Gunny (2010) to detect real management but extending the original sample period.
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