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Earnings management in interconnected networks: a perspective

Author

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  • Peterson K. Ozili

Abstract

Purpose - The purpose of this paper is to examine how firms manage earnings when firms are in interconnected networks, that is, when firms are interconnected to each other in a way that the survival of one firm is crucial to the survival of other firms connected to it. Design/methodology/approach - The paper employs network typology to provide some insight on the earnings management behaviour of firms in regulated and unregulated networks or systems. Findings - The author shows that firms in the inner core of interconnected networks are more likely to rely on income-smoothing behaviour as a preferred form of earnings management because it stabilises the firm’s link with other firms in the network. In regulated networks, the author proposes a negative relationship between a firm’s network centrality and the number of earnings management strategies the manager can adopt. Also, the author proposes a positive relationship between a firm’s network centrality and the propensity to smooth earnings or income when firms are concerned about their reputation or regulatory scrutiny. Originality/value - This paper is a brief note on earnings management, and is the first study to provide a perspective on how earnings management can be explained using a network typology.

Suggested Citation

  • Peterson K. Ozili, 2017. "Earnings management in interconnected networks: a perspective," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 33(2), pages 150-163, November.
    • Handle: RePEc:eme:jeaspp:jeas-02-2017-0003
    DOI: 10.1108/JEAS-02-2017-0003
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    Cited by:

    1. Peterson K. Ozili, 2019. "Financial stability: does social activism matter?," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 28(2), pages 183-214, June.
    2. Ozili, Peterson K, 2019. "Determinants of Banking Stability in Nigeria," MPRA Paper 94092, University Library of Munich, Germany.

    More about this item

    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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