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The Informational and Strategic Impacts of Real Earnings Management

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  • Shirley J. Ho

    (Department of Economics, National Chengchi University)

  • Hao-Chang Sung

    (Department of Money and Banking, National Chengchi University)

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    Abstract

    We address the informational and strategic impacts of real earnings management (REM) in a two-period oligopoly model with one-sided information. For the strategic impacts of REM, once the demand falls short of expectation, a firm should raise the price instead of cutting it to reach the earnings target. For the informational impacts, to maintain opponents' uncertainty, the privately informed firm could conceal its identity by taking a mixed strategy and setting the first period price to be higher than in the separating equilibrium. Finally, the presence of tunnelling from cross-shareholding firm will enhance the price cut in the second period.

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    Bibliographic Info

    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 13 (2012)
    Issue (Month): 2 (November)
    Pages: 355-380

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    Handle: RePEc:cuf:journl:y:2012:v:13:i:2:n:5:ho

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    Related research

    Keywords: Real earnings management; Incomplete information; Price manipulation; Cross-shareholding; Tunnelling;

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    References

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    1. Friedman, Eric & Johnson, Simon & Mitton, Todd, 2003. "Propping and tunneling," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 732-750, December.
    2. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
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    12. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
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