The Effects Of Taxes, Agency Costs And Information Asymmetry On Earnings Management: A Comparison Of Public And Private Firms

Posted: 27 Oct 1999  

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

David G. Harris

Syracuse University - Joseph I. Lubin School of Accounting

Abstract

The realization of security gains and losses to manage earnings in publicly-traded bank holding companies has been documented in a large number of studies, but very little is known about why managers engage in this behavior. Two possible explanations for earnings management put forth by Warfield, Wild, and Wild (1995) are that managers engage in this behavior either to circumvent accounting-based contracts designed to mitigate agency problems or to reduce information asymmetry.

We compare public and private banks' security gain/loss realizations to determine how their earnings management differs. We find that public banks consistently engage in more earnings management than private banks and that the portion of their current period securities gains and losses realizations attributable to earnings management is more highly associated with next period's earnings before security gains and losses. These findings are consistent with earnings management occurring due to greater information asymmetry in public firms, and suggest that earnings management may not necessarily lead to the erosion in the quality of earnings suggested by Levitt (1988).

JEL Classification: M41, M43, D82

Suggested Citation

Beatty, Anne and Harris, David G., The Effects Of Taxes, Agency Costs And Information Asymmetry On Earnings Management: A Comparison Of Public And Private Firms. Review of Accounting Studies, Vol 4, Issues 3 & 4. Available at SSRN: https://ssrn.com/abstract=182231

Anne L. Beatty (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

David G. Harris

Syracuse University - Joseph I. Lubin School of Accounting ( email )

Whitman School of Management
721 University Ave
Syracuse, NY 13244-2130
United States
315-443-3362 (Phone)
315-443-5457 (Fax)

Paper statistics

Abstract Views
2,095