Behavioral Studies of the Effects of Regulation on Earnings Management and Accounting Choice

Abstract

We review recent behavioral studies of the effects of regulation on earnings management and accounting choice. Our review examines the impact of financial reporting, auditing, and other corporate governance regulations on the beliefs and choices of managers, auditors and corporate directors. Behavioral studies contribute to the broader literature by shedding light on potential unintended consequences and overall efficacy of proposed regulations, revealing the roles of specific actors and the motives behind reporting choices, and demonstrating what determines managers' preferences for different earnings management methods (both real and accruals based). We also discuss areas that have received less attention that provide promising avenues for future behavioral research involving regulation, earnings management, and accounting choice.

Keywords: earnings management, accounting choice, financial reporting, regulation, corporate governance, auditing

JEL Classification: M41, M43, M49, G34, G38