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Earnings Management and the Revelation Principle

Author

Listed:
  • Anil Arya

    (The Ohio State University)

  • Jonathan Glover

    (Carnegie Mellon University)

  • Shyam Sunder

    (Carnegie Mellon University)

Abstract

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 of 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.

Suggested Citation

  • Anil Arya & Jonathan Glover & Shyam Sunder, 1998. "Earnings Management and the Revelation Principle," Review of Accounting Studies, Springer, vol. 3(1), pages 7-34, March.
    • Handle: RePEc:spr:reaccs:v:3:y:1998:i:1:d:10.1023_a:1009631714430
    DOI: 10.1023/A:1009631714430
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    References listed on IDEAS

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    Cited by:

    1. Brian Mittendorf, 2010. "The role of audit thresholds in the misreporting of private information," Review of Accounting Studies, Springer, vol. 15(2), pages 243-263, June.
    2. Haijin Lin & David E. M. Sappington, 2015. "Welfare-enhancing fraudulent behavior," Review of Accounting Studies, Springer, vol. 20(1), pages 343-370, March.
    3. Qi Chen & Thomas Hemmer & Yun Zhang, 2011. "On the optimal use of loose monitoring in agencies," Review of Accounting Studies, Springer, vol. 16(2), pages 328-354, June.
    4. Anil Arya & Jonathan Glover, 2008. "Performance measurement manipulation: cherry-picking what to correct," Review of Accounting Studies, Springer, vol. 13(1), pages 119-139, March.
    5. Sunil Dutta & Qintao Fan, 2014. "Equilibrium earnings management and managerial compensation in a multiperiod agency setting," Review of Accounting Studies, Springer, vol. 19(3), pages 1047-1077, September.
    6. Joshua Ronen & Varda (Lewinstein) Yaari, 2007. "Demand for the truth in principal–agent relationships," Review of Accounting Studies, Springer, vol. 12(1), pages 125-153, March.
    7. Julia D’Souza & K. Ramesh & Min Shen, 2010. "Disclosure of GAAP line items in earnings announcements," Review of Accounting Studies, Springer, vol. 15(1), pages 179-219, March.
    8. Chi-Wen Jevons Lee & Laura Yue Li & Heng Yue, 2006. "Performance, Growth and Earnings Management," Review of Accounting Studies, Springer, vol. 11(2), pages 305-334, September.

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