On the Association between Voluntary Disclosure and Earnings Management

49 Pages Posted: 30 Sep 1996

See all articles by Ron Kasznik

Ron Kasznik

Stanford Graduate School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 1996

Abstract

This paper investigates the association between corporate voluntary disclosure and management's discretion over accounting choices. In particular, it examines the role of earnings management in mitigating costs associated with management earnings forecast errors. The empirical results are consistent with the prediction that managers, fearing costly legal actions by shareholders and loss of reputation for credibility, use discretionary accruals to reduce their forecasting errors. Specifically, the paper documents that managers who overestimate the earnings number manage reported earnings upward, and that the extent of discretionary accruals is associated with various securities litigation cost factors and the amount of management's accounting flexibility. Having identified the role of accounting discretion in mitigating costs associated with management earnings forecast errors, the study raises the possibility that the degree of accounting discretion affects corporate voluntary disclosure policies.

JEL Classification: M41, M43, K22

Suggested Citation

Kasznik, Ron, On the Association between Voluntary Disclosure and Earnings Management (August 1996). Available at SSRN: https://ssrn.com/abstract=15062 or http://dx.doi.org/10.2139/ssrn.15062

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