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Corporate Earnings: Facts and Fiction

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  • Baruch Lev

Abstract

Manipulated earnings played a central role in the slew of corporate scandals which surfaced during the last three years. This article focuses on the vulnerability of earnings to manipulation by managers: it surveys the empirical record of manipulation, their major objectives, and the means of manipulation. It then focuses on the major source of earnings manipulation--the multitude of estimates and subjective judgments underlying the comutation of earnings. The article accordingly concludes with a proposal to curb manipulation by requiring managers to routinely compare key estimates with ex post realizations, and revise earnings in case of large deviations.

Suggested Citation

  • Baruch Lev, 2003. "Corporate Earnings: Facts and Fiction," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 27-50, Spring.
  • Handle: RePEc:aea:jecper:v:17:y:2003:i:2:p:27-50
    Note: DOI: 10.1257/089533003765888412
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/089533003765888412
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    References listed on IDEAS

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    Cited by:

    1. Agliardi, Elettra & Andergassen, Rainer, 2009. "Last resort gambles, risky debt and liquidation policy," Review of Financial Economics, Elsevier, vol. 18(3), pages 142-155, August.
    2. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    3. Besancenot, Damien & Vranceanu, Radu, 2007. "Equilibrium (dis)honesty," Journal of Economic Behavior & Organization, Elsevier, vol. 64(2), pages 232-249, October.
    4. T. Christopher Borek & Angelo Frattarelli & Oliver Hart, 2014. "Tax Shelters or Efficient Tax Planning? A Theory of the Firm Perspective on the Economic Substance Doctrine," Journal of Law and Economics, University of Chicago Press, vol. 57(4), pages 975-1000.
    5. Besancenot, Damien & Vranceanu, Radu, 2009. "Strategic managerial dishonesty and financial distress," Research in Economics, Elsevier, vol. 63(1), pages 11-21, March.
    6. Lamiraud, Karine & Vranceanu , Radu, 2015. "Group Gender Composition and Economic Decision-Making," ESSEC Working Papers WP1515, ESSEC Research Center, ESSEC Business School.
    7. James K. Self, 2006. "Asymmetric Stationarity in National Stock Market Indices: An MTAR Analysis," The Journal of Business, University of Chicago Press, vol. 79(6), pages 3153-3174, November.
    8. Besancenot, Damien & Vranceanu, Radu, 2005. "Socially Efficient Managerial Dishonesty," ESSEC Working Papers DR 05005, ESSEC Research Center, ESSEC Business School.
    9. Lambrecht, Bart M. & Myers, Stewart C., 2008. "Debt and managerial rents in a real-options model of the firm," Journal of Financial Economics, Elsevier, vol. 89(2), pages 209-231, August.
    10. Ho, Shirley J. & Mallick, Sushanta K., 2015. "A Copayment Auditing Scheme for Financial Misreporting," The International Journal of Accounting, Elsevier, vol. 50(1), pages 53-74.
    11. repec:hrv:faseco:30703804 is not listed on IDEAS
    12. Francesco Giuli & Marco Manzo, 2005. "Protecting Savings: Do We Need a Supervision Authority?," Working Papers 84, University of Rome La Sapienza, Department of Public Economics.
    13. Lorenzo Lucianetti & Valentina Battista, 2015. "La manipolazione dei valori di bilancio: pressione del management e tratti personali nell’attività del controller," MANAGEMENT CONTROL, FrancoAngeli Editore, vol. 2015(1), pages 101-132.
    14. Andergassen, Rainer, 2008. "High-powered incentives and fraudulent behavior: Stock-based versus stock option-based compensation," Economics Letters, Elsevier, vol. 101(2), pages 122-125, November.
    15. repec:rim:rimwps:31-07 is not listed on IDEAS
    16. Simona FRANZONI, 2010. "International comparison of the remuneration system disclosure," EuroEconomica, Danubius University of Galati, issue 25, pages 35-44, October.
    17. Besancenot, Damien & Vranceanu, Radu, 2004. "The Information Limit to Honest Managerial Behavior," ESSEC Working Papers DR 04008, ESSEC Research Center, ESSEC Business School.
    18. repec:eee:mulfin:v:41:y:2017:i:c:p:23-46 is not listed on IDEAS
    19. Peat, Maurice & Svec, Jiri & Wang, Jue, 2014. "Reporting bias in incomplete information model," Economics Letters, Elsevier, vol. 123(1), pages 45-49.
    20. Baschieri, Giulia & Carosi, Andrea & Mengoli, Stefano, 2016. "Does the earnings quality matter? Evidence from a quasi-experimental setting," Finance Research Letters, Elsevier, vol. 19(C), pages 146-157.
    21. Vranceanu, Radu, 2003. "Manager Unethical Behavior During The New Economy Bubble," ESSEC Working Papers DR 03026, ESSEC Research Center, ESSEC Business School.
    22. Dr. Mohammad Hossein & Vadiei Nowghabi & Saleh Anbarani, 2012. "Survey Effect Of Gender And Field Of Study On Students' Judegment Of The Morality Of Earnings Management," Far East Journal of Marketing and Management, Far East Research Centre, vol. 2(2), pages 12-26, April.

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