Uncertainty and the Decision to Manage Earnings
28 Pages Posted: 16 Jan 2009 Last revised: 7 Sep 2010
Date Written: January 15, 2009
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: Suggested Citation