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Is earnings management opportunistic or beneficial? An agency theory perspective

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  • Jiraporn, Pornsit
  • Miller, Gary A.
  • Yoon, Soon Suk
  • Kim, Young S.

Abstract

Earnings management has been cast into negative light due to the recent corporate scandals and, therefore, is viewed as detrimental to the firm. Enron and Worldcom represent two of the most egregious cases of opportunistic earnings management that led to the largest bankruptcies in U.S. history. However, some argue that earnings management may be beneficial because it improves the information value of earnings by conveying private information to the stockholders and the public. We offer agency theory as a tool to distinguish between the opportunistic and beneficial uses of earnings management. The empirical evidence suggests that firms where earnings management occurs to a larger (less) extent suffer less (more) agency costs. Moreover, a positive relation is documented between firm value and the extent of earnings management. Taken together, the results reveal that earnings management is, on average, not detrimental.

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Bibliographic Info

Article provided by Elsevier in its journal International Review of Financial Analysis.

Volume (Year): 17 (2008)
Issue (Month): 3 (June)
Pages: 622-634

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Handle: RePEc:eee:finana:v:17:y:2008:i:3:p:622-634

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Web page: http://www.elsevier.com/locate/inca/620166

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References

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Cited by:
  1. Kenneth J. Hunsader & Gwendolyn Pennywell, 2011. "Earnings management and the stock market response to the Sarbanes-Oxley Act based on a measure of competitive strategy," Review of Accounting and Finance, Emerald Group Publishing, vol. 10(4), pages 368-384, November.
  2. Iatridis, George Emmanuel, 2011. "Accounting disclosures, accounting quality and conditional and unconditional conservatism," International Review of Financial Analysis, Elsevier, vol. 20(2), pages 88-102, April.
  3. Miglo, Anton, 2010. "Capital structure and earnings manipulation," Journal of Economics and Business, Elsevier, vol. 62(5), pages 367-382, September.
  4. Oudam Toeung, 2013. "Investor sophistication and earnings management during economic crisis: evidence from the banking industry," Post-Print dumas-00934329, HAL.
  5. Iatridis, George & Kadorinis, George, 2009. "Earnings management and firm financial motives: A financial investigation of UK listed firms," International Review of Financial Analysis, Elsevier, vol. 18(4), pages 164-173, September.
  6. Iatridis, George, 2010. "International Financial Reporting Standards and the quality of financial statement information," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 193-204, June.
  7. Mohamed El Hedi AROURI & Aldo LÉVY & Duc Khuong NGUYEN, 2010. "ROE and Value Creation under IAS/IFRS: Evidence of Discordance from French Firms," European Financial and Accounting Journal, University of Economics, Prague, vol. 2010(3), pages 84-112.

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