Earnings Management to Exceed Thresholds
Posted: 11 Nov 1998
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.
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