Abstract:The social welfare costs of earnings management have been known to include the distortion of real investment decisions (resulting in inefficient allocation of resources), as well as deadweight loss incurred by the firms to manage earnings. One of the ways used to mitigate the effect of these costs is increasing the level of earnings management deterrence through legislation, regulation and enforcement, as in the Sarbanes-Oxley Act. However, by analyzing a rational expectations equilibrium that includes firms, … Show more
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