11_Earnings Management幻灯片.pptVIP

* * Earnings Management * Chapter 11Earnings Management I * What is Earnings Management? Earnings management is the choice by a manager of accounting policies, or real actions that affect earnings, so as to achieve some specific reported earnings objective * Patterns of Earnings Management Bath Income minimization Income maximization Income smooth * Motivations for Earnings Management Contractual motivations Bonus plan hypothesis: to manage cash bonus Evidence: [Healy (1985)] Debt covenant hypothesis: to manage debt covenants Evidence: Dichev Skinner (2002), text Section 8.5.3 Political cost hypothesis To lower political “heat” Evidence: Jones (1991), text Section 8.5.3 * Motivations for Earnings Management (cont’d) To meet earnings expectations Significant negative effects on share price and manager reputation if expectations not met Other motivations Initial public offerings (IPO) Seasoned equity offering (SEO) 10% phenomenon in China * The Good Side of Earnings Management Contract-based arguments To give firm some flexibility in the face of rigid, incomplete contracts Bonus contracts based on net income New accounting standards may lower net income and/or increase volatility. May adversely affect manager effort Debt covenant contracts New accounting standards may increase probability of debt covenant violation Contract violation is costly, earnings management may be low-cost way to work around * The Good Side of Earnings Management (cont’d) Investor-based arguments To credibly communicate inside information to investors Blocked communication may inhibit direct disclosure of earnings expectations Discretionary accrual management as a way to credibly reveal management’s inside information about earnings expectations Manager foolish to report more earnings than can be maintained Manage reported earnings to an amount management expects will persist * Theory Evidence of Good Earnings Management Theoretical models supporting good earnings management Dem