Target Shooting: Review of Earnings Management Around Earnings Benchmarks

Journal of Accounting Literature, Vol. 27, pp. 25-70, 2008

68 Pages Posted: 22 Jul 2008 Last revised: 23 Feb 2018

See all articles by Ahsan Habib

Ahsan Habib

Auckland University of Technology

James C. Hansen

Weber State University Goddard School of Business and Economics

Date Written: February 14, 2009

Abstract

In this paper we review the literature dealing with earnings management around earnings benchmarks. The earnings benchmarks are the earnings level (loss avoidance), earnings improvement (earnings changes), and the analyst forecast benchmark. Healy and Wahlen [1999] review the implications of earnings management studies for standard setters. With a standard setter framework and a focus on earnings benchmarks as the motive for earnings management, we document the direction of earning management studies since Healy and Wahlen [1999]. Studies have (1) found that firms' management have market incentives and also compensation incentives to meet or beat the three earnings benchmarks, (2) questioned the cross-sectional distribution evidence of the frequency of earnings management around the earnings benchmarks, (3) documented methods firms' management use to manage earnings to beat these benchmarks, and (4) tested whether the market sees through firms that manage earnings to beat benchmarks. We discuss research that identifies factors that constrain earnings management to beat benchmarks and research that has attempted to determine which benchmark is the most important to firms' management. We also discuss areas of interest to standard setters that have not been addressed by current accounting literature and present avenues for future research.

Keywords: earnings management, earnings distributions, earnings benchmarks

JEL Classification: M41, M43, M44, J33, G12, G14

Suggested Citation

Habib, Ahsan and Hansen, James C., Target Shooting: Review of Earnings Management Around Earnings Benchmarks (February 14, 2009). Journal of Accounting Literature, Vol. 27, pp. 25-70, 2008. Available at SSRN: https://ssrn.com/abstract=1162852

Ahsan Habib

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, Auckland 1142
New Zealand

James C. Hansen (Contact Author)

Weber State University Goddard School of Business and Economics ( email )

1337 Edvalson St. Dept 3803
Ogden, UT 84408
United States
801-626-6433 (Phone)

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