Earnings Management and Earnings Quality: Theory and Evidence

Beyer, Anne; Guttman, Ilan; Marinović, Ivan

doi:10.2139/ssrn.2516538

Cited by 43 publications

(36 citation statements)

References 25 publications

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“…For example, when there are multiple firms in the market, it is possible that firms use the choice of conservatism as a signaling mechanism (Bagnoli and Watts 2005;Smith 2015). Second, by focusing only on one period, we abstract from the dynamic nature of earnings management (Drymiotes and Hemmer 2013;Beyer et al 2014;Dutta and Fan 2014) and the issues that involve intertemporal consideration of the relation between conservatism and incentives contracts (Glover and Lin 2015). More work is clearly warranted to understand the optimal level of conservatism within a dynamic contracting setting.…”

Section: Discussionmentioning

confidence: 99%

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Optimal Conservatism with Earnings Manipulation

Bertomeu

Darrough

Xue

2016

Contemporary Accting Res

101

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This paper examines the role of conservatism when an agent can manipulate upcoming earnings before all uncertainty is resolved. An increase in conservatism, by reducing the likelihood of favorable earnings, requires steeper performance pay to maintain the same level of incentives, which in turn increases the equilibrium earnings manipulation. Trade-offs between inducing effort and curbing manipulation predict an interior level of conservatism as optimal. The optimal level of conservatism is positively associated with enforcement, economic profitability and earnings quality, and negatively associated with agency frictions. In particular, we show that more economically profitable firms choose to be more conservative. We also establish that the association between performance pay and manipulation identifies whether conservatism is optimally chosen or exogenously imposed. In an application to debt contracting, we show that optimal conservatism is negatively associated with borrowers' bargaining power. Prudence optimale et manipulation des r esultats R ESUM ECette etude examine le rôle de la prudence comptable lorsqu'un g erant peut manipuler le compte de r esultat. Une mesure plus prudente est telle que, pour un certain risque economique, la probability d'un bon r esultat comptable est plus faible et, donc, se traduit par des bonus moins fr equents. Nous d emontrons que le contrat de compensation du g erant doit s'ajuster en augmentant le niveau du bonus, ce qui conduit le g erant a d'avantage manipuler les resultats pour atteindre le bonus plus elev e. Un exc es de prudence, par cons equent, peut donner lieu plus de manipulation. Notre th eorie pr edit un niveau de prudence optimal et, a l' equilibre, les entreprises avec de meilleures perspectives economiques, des mesures comptables de meilleure qualit e ou moins de pouvoir de n egociation avec leurs banques, choisissent un niveau de prudence sup erieur.

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Section: Discussionmentioning

confidence: 99%

“…Hereafter, we refer to z as reported accounting earnings. As in Laux and Stocken (2012) and Beyer, Guttman and Marinovic (2014), the agent can increase reported accounting earnings at a personal cost. Let m 2 (0, 1) denote manipulation.…”

mentioning

confidence: 99%

Optimal Conservatism with Earnings Manipulation

Bertomeu

Darrough

Xue

2016

Contemporary Accting Res

101

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“…Instead of considering reported earnings, Nikolaev [2016] examines the structural relationship between cash flows and accruals to construct a measure of earnings quality. Similarly focusing on earnings quality, Beyer, Guttman, and Marinovic [2014a] estimate a dynamic model of earnings management. As in the current paper, Beyer, Guttman, and Marinovic [2014a] develop a multiperiod model of misreporting.…”

Section: Related Literaturementioning

confidence: 99%

“…Similarly focusing on earnings quality, Beyer, Guttman, and Marinovic [2014a] estimate a dynamic model of earnings management. As in the current paper, Beyer, Guttman, and Marinovic [2014a] develop a multiperiod model of misreporting. However, instead of estimating firm-specific manipulation in earnings, their paper evaluates investor uncertainty about firm values.…”

Section: Related Literaturementioning

confidence: 99%

“…By allowing for the possibility that some misstatements stay undetected, this paper extends two 6 The bias in stock price equals the difference between the stock price and the intrinsic stock price divided by the stock price. 7 See, for example, Dye [1988], Stein [1989], Feltham and Xie [1994], Fischer and Verrecchia [2000], Goldman and Slezak [2006], Crocker and Slemrod [2007], and Beyer, Guttman, and Marinovic [2014b]. For a review of the theoretical research, see Lambert [2001] and Ronen and Yaari [2008].…”

Section: Introductionmentioning

confidence: 99%

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How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model

Zakolyukina

2018

J of Accounting Research

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This paper uses data on detected misstatements-earnings restatementsand a dynamic model to estimate the extent of undetected misstatements that violate GAAP. The model features a CEO who can manipulate his firm's stock price by misstating earnings. I find the CEO's expected cost of misleading investors is low. The probability of detection over a five-year horizon is 13.91%, and the average misstatement, if detected, results in an 8.53% loss in the CEO's retirement wealth. The low expected cost implies a high fraction of CEOs who misstate earnings at least once at 60%, with 2%-22% of CEOs

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