Earnings Management to Exceed Thresholds

Posted: 11 Nov 1998

See all articles by Francois Degeorge

Francois Degeorge

University of Lugano - Faculty of Economics; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

Jayendu Patel

Harvard University

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

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Abstract

Earnings provide important information for investment decisions. Thus executives--who are monitored by investors, directors, customers, and suppliers--acting in self-interest and at times for shareholders, have strong incentives to manage earnings. We introduce behavioral thresholds for earnings management. A model shows how thresholds induce specific types of earnings management. Empirical explorations identify earnings management to exceed each of three thresholds: report of positive profits, sustain recent performance, and meet analysts' expectations. The positive profits threshold proves predominant. The future performance of firms that have possibly boosted earnings just across a threshold appears poorer than that of less suspect control groups.

Suggested Citation

Degeorge, Francois and Patel, Jayendu S. and Zeckhauser, Richard J., Earnings Management to Exceed Thresholds. Available at SSRN: https://ssrn.com/abstract=138588

Francois Degeorge (Contact Author)

University of Lugano - Faculty of Economics ( email )

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Swiss Finance Institute

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Jayendu S. Patel

Harvard University ( email )

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Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS) ( email )

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National Bureau of Economic Research (NBER) ( email )

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