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Earnings Management and the Revelation Principle


Author Info

  • Jonathan C. Glover

    (Graduate School of Industrial Administration (GSIA))

  • Anil Arya

    (Ohio State University, Fisher College of Business)

  • Shyam NMI Sunder

    (School of Management)


When the Revelation Principle (RP) holds, managing earnings confers no advantage over revelation. We construct an explanation for earnings management that is based on limitations on owners? ability to make commitments (a violation of the RP?s assumptions). Traditionally, earnings management is seen as sneaky managers pulling the wool over the eyes of gullible owners by manipulating accruals; our limited commitment story suggests that the owners, too, can benefit from earnings management. We categorize a variety of extant explanations of earnings management, along with our own, according to which the assumptions of the RP each explanation violates. Plausibility of multiple simultaneous violations of the assumptions and strategic use of various accounting and real instruments of earnings management, complicate the task of detecting such management in field data.

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm120.

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Date of creation: 31 Aug 1999
Date of revision:
Handle: RePEc:ysm:somwrk:ysm120

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Cited by:
  1. Guillaume Roger, 2013. "Optimal Contract under Moral Hazard with Soft Information," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 55-80, November.
  2. Shyam Sunder, 2011. "Paradox of Writing Clear Rules: Interplay of Financial Reporting Standards and Engineering," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 1, pages 119-130, December.
  3. Jordi Blanes i Vidal & Marc Möller, 2013. "Decision–Making and Implementation in Teams," CEP Discussion Papers dp1208, Centre for Economic Performance, LSE.
  4. Anil Arya & Shyam Sunder & Jonathan Glover, 2002. "Are Unmanaged Earnings Always Better for Shareholders?," Yale School of Management Working Papers ysm295, Yale School of Management, revised 01 Feb 2003.
  5. Mouna Ben rejeb attia & Houda Sassi & Naima Lassoued, 2013. "Signaling over income smoothing and IFRS adoption by banks: a panel data analysis on MENA countries," Economics Bulletin, AccessEcon, vol. 33(3), pages 2340-2356.
  6. Gao, Pingyang, 2008. "Disclosure Quality, Cost of Capital, and Investors’ Welfare," MPRA Paper 9478, University Library of Munich, Germany, revised Jun 2008.
  7. De Waegenaere, A.M.B. & Wielhouwer, J.L., 2011. "On the effects of the degree of discretion in reporting managerial performance," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4260929, Tilburg University.
  8. Antle, Rick & Bogetoft, Peter & Stark, Andrew W., 2000. "Information Systems, Incentives and the Timing of Investment," Unit of Economics Working papers 24201, Royal Veterinary and Agricultural University, Food and Resource Economic Institute.
  9. Anh Duc Ngo & Oscar Varela, 2012. "Earnings smoothing and the underpricing of seasoned equity offerings," Managerial Finance, Emerald Group Publishing, vol. 38(9), pages 833-859, September.
  10. Jordi Blanes i Vidal & Marc Möller, 2013. "Decision-making and implementation in teams," LSE Research Online Documents on Economics 51544, London School of Economics and Political Science, LSE Library.
  11. Bo Sun, 2010. "Asset Returns with Earnings Management," 2010 Meeting Papers 5, Society for Economic Dynamics.
  12. Thomas Pfeiffer, 2004. "The Value of Information in the Hold-Up Problem," German Economic Review, Verein für Socialpolitik, vol. 5(2), pages 177-203, 05.


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