Uncertainty and the Decision to Manage Earnings

28 Pages Posted: 16 Jan 2009 Last revised: 7 Sep 2010

Theophanis C. Stratopoulos

University of Waterloo - School of Accounting and Finance

Thomas W. Vance

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: January 15, 2009

Abstract

With this study, we consider whether characteristics of the information environment in which a manager operates are a driver of earnings management behavior. Specifically, does the manager's confidence in the accuracy of a given forecast of future performance affect whether an attempt to manipulate is made and the magnitude of the attempt? We present a model of manager behavior, given a desired performance target and forecast uncertainty. Implications of the model suggest that as firms invest in improved information systems, firm managers will attempt to manipulate reported performance more often, using smaller magnitude adjustments. These results suggest that earnings management, already difficult to detect, will become more challenging to identify as information technology improves.

Keywords: Earnings management, earnings forecast, accounting information systems

JEL Classification: M41

Suggested Citation

Stratopoulos, Theophanis C. and Vance, Thomas W., Uncertainty and the Decision to Manage Earnings (January 15, 2009). CAAA Annual Conference 2009 Paper. Available at SSRN: https://ssrn.com/abstract=1328479 or http://dx.doi.org/10.2139/ssrn.1328479

Theophanis C. Stratopoulos (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada
519-888-4567 x35943 (Phone)

Thomas W. Vance

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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