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Earnings Management and the Revelation Principle

Author

Listed:
  • Jonathan C. Glover

    (Graduate School of Industrial Administration (GSIA))

  • Anil Arya

    (Ohio State University, Fisher College of Business)

  • Shyam NMI Sunder

    (School of Management)

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 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

  • Jonathan C. Glover & Anil Arya & Shyam NMI Sunder, 1999. "Earnings Management and the Revelation Principle," Yale School of Management Working Papers ysm120, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm120
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    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=165848
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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