Horizon-Induced Optimism as a Gateway to Earnings Management

43 Pages Posted: 5 Jun 2013 Last revised: 23 Aug 2021

See all articles by H. Scott Asay

H. Scott Asay

University of Iowa - Department of Accounting

Date Written: November 14, 2016

Abstract

Recent work in accounting suggests that managerial optimism can lead managers to escalate income-increasing earnings management. In this paper, I examine how a fundamental attribute of the earnings management setting – the amount of time between the earnings management decision and the future reversal – serves as one potential source of managerial optimism. I conduct two experiments to test whether the amount of time between the earnings management decision and the future reversal systematically induces optimism that increases participants’ propensity to engage in behavior that is analogous to accruals-based earnings management and to real earnings management, holding constant incentives, agency frictions, and the information environment. My results indicate that, independent of their innate optimism, the time between the earnings management decision and the future reversal likely encourages managers to overestimate their ability to compensate for current-period earnings management through strong future performance. This optimism, in turn, likely increases managers’ propensity to engage in both forms of earnings management.

Keywords: optimism, accruals-based earnings management, real earnings management

Suggested Citation

Asay, Hamilton Scott, Horizon-Induced Optimism as a Gateway to Earnings Management (November 14, 2016). Available at SSRN: https://ssrn.com/abstract=2274180 or http://dx.doi.org/10.2139/ssrn.2274180

Hamilton Scott Asay (Contact Author)

University of Iowa - Department of Accounting ( email )

S232 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

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