The Effect of Accounting Comparability on Earnings Management

Abstract:     
This study investigates whether and how managers’ opportunistic earnings management activities are affected by the degree of their firms’ accounting comparability with other firms. Using a large sample of U.S. firms, I find that managers’ real earnings management (REM) increases whereas their accrual-based earnings management (AEM) decreases with the degree of their firms’ accounting comparability with other firms, and that this substitution of REM for AEM is more pronounced in the post-SOX period. I also find that managers’ opportunistic behavior to “escape” to REM facing higher accounting comparability is mitigated when their firms’ information environment and/or audit quality is better, and that the propensity of managers meeting or beating analysts’ earnings forecasts is not materially affected by accounting comparability due to the offsetting effect of AEM decrease and REM increase on earnings level. These findings are robust to various sensitivity tests.

Number of Pages in PDF File: 48

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