Is Earnings Management Really Rampant? Evidence from a Structural Model

37 Pages Posted: 16 Apr 2018 Last revised: 27 Aug 2020

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

Washington University in St. Louis - John M. Olin Business School

Edwige Cheynel

Washington University in St. Louis - John M. Olin Business School

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy

Ying Liang

Georgia State University - J. Mack Robinson College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 29, 2020

Abstract

We derive a measure of earnings management cost and the associated equilibrium level of earnings management from the cross-sectional properties of earnings and prices. This approach enables us to separate economic shocks from reporting discretion by modeling the economic trade-off faced by management. The trade-off can be easily estimated from a closed-form likelihood function. Overall, the estimates suggest that earnings management is modest, consistent with the conjecture in Ball (2013) that earnings management is not as rampant as what prior research would suggest. Consistent with prior studies, the measure suggests more earnings management during seasoned equity offerings, for smaller and growing firms, as well as in industries with more irregularities.

Keywords: earnings management; structural estimation; financial accounting; reporting; signalling; bias.

JEL Classification: D83; G14; M4

Suggested Citation

Bertomeu, Jeremy and Cheynel, Edwige and Li, Edward Xuejun and Liang, Ying, Is Earnings Management Really Rampant? Evidence from a Structural Model (May 29, 2020). Baruch College Zicklin School of Business Research Paper No. 2018-04-02, Available at SSRN: https://ssrn.com/abstract=3153047 or http://dx.doi.org/10.2139/ssrn.3153047

Jeremy Bertomeu (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Edwige Cheynel

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3235 (Phone)

Ying Liang

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
329
Abstract Views
3,209
Rank
76,540
PlumX Metrics