Disclosure Quality and Earnings Management

34 Pages Posted: 8 May 2001 Last revised: 8 Jan 2019

See all articles by Jian Zhou

Jian Zhou

University of Hawaii at Manoa

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2001

Abstract

This study examines the relationship between disclosure quality and earnings management. Corporate disclosure and earnings management are both subject to managers' discretion; therefore, managers are likely to consider their interaction when exercising managerial discretion. This study employs a simultaneous equations model to test the hypothesis that disclosure quality and earnings management are negatively related. It uses ratings published by the Association for Investment Management and Research to measure corporate disclosure, and discretionary accruals from the modified Jones model to measure earnings management. Consistent with theoretical predictions, the empirical analysis indicates that there is a statistically significant negative relationship between corporate disclosure and earnings management. Firms that disclose less tend to engage more in earnings management and vice versa. This result holds even after controlling for the effects of potentially confounding variables, and for all three components of corporate disclosure: annual disclosure, quarterly disclosure, and investor relations disclosure. By documenting a consistent negative relationship between corporate disclosure and earnings management, the study provides evidence on how management uses the flexibility afforded it under current minimum disclosure requirements to exercise discretion in reporting earnings. This has implications for the interpretation of and information conveyed by reported accounting earnings. It also provides support for the SEC's approach to attenuating earnings management by requiring more informative corporate disclosure.

Keywords: Earning management; Disclosure quality; Discretionary accruals

JEL Classification: M41, M43, M45

Suggested Citation

Zhou, Jian and Lobo, Gerald J., Disclosure Quality and Earnings Management (May 1, 2001). Available at SSRN: https://ssrn.com/abstract=265550 or http://dx.doi.org/10.2139/ssrn.265550

Jian Zhou (Contact Author)

University of Hawaii at Manoa ( email )

Honolulu, HI 96822
United States

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Register to save articles to
your library

Register

Paper statistics

Downloads
12,349
rank
272
Abstract Views
36,209
PlumX Metrics