a review of the earnings strongmanagementstrong literature and its.pdf

A REVIEW OF THE EARNINGS MANAGEMENT LITERATURE AND ITS IMPLICATIONS FOR STANDARD SETTING Paul M. Healy Harvard Business School Boston, MA 02163 and James M. Wahlen Kelley School of Business Indiana University Bloomington, IN 47405-1701 November 1998 Preliminary Draft: This paper is a summary of the empirical evidence on earnings management and its implications for standard setters. Although we have tried to refer to all of the relevant recent studies, we recognize that there may be some that we have inadvertently not cited. We apologize in advance to the authors of any such studies and welcome any comments on the paper. We acknowledge helpful comments and suggestions from Greg Miller, Christopher Noe, Kathy Petroni, and Jerry Salamon. A REVIEW OF THE EARNINGS MANAGEMENT LITERATURE AND ITS IMPLICATIONS FOR STANDARD SETTING Abstract In this paper we review the academic evidence on earnings management and its implications for accounting standard setters and regulators. We structure our review around a rich set of questions likely to be of interest to standard setters. Specifically, we review the empirical evidence on which specific accruals are used to manage earnings, the magnitude and frequency of any earnings management, and whether earnings management affects resource allocation in the economy. Our review also identifies a number of important opportunities for future research on earnings management.