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Is earnings management opportunistic or beneficial? An agency theory perspective

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620166

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