Earnings Management in Interconnected Networks: A Perspective

Journal of Economic and Administrative Sciences Vol. 33 No. 2

21 Pages Posted: 20 Sep 2017

See all articles by Peterson K Ozili

Peterson K Ozili

University of Essex - Essex Business School; Central Bank of Nigeria

Date Written: 2017

Abstract

This article examine how firms manage earnings when firms are in interconnected networks, that is, when firms are interconnected to each other in a way that the survival of one firm is crucial to the survival of other firms connected to it. The article employs network typology to provide some insight on the earnings management behaviour of firms in regulated and unregulated networks or systems. We find that firms in the inner core of interconnected networks are more likely to rely on income smoothing behaviour as a preferred form of earnings management because it stabilises the firm’s link with other firms in the network. In regulated networks, we propose a negative relationship between a firm’s network centrality and the number of earnings management strategies the manager can adopt. Also, we propose a positive relationship between a firm’s network centrality and the propensity to smooth earnings or income when firms are concerned about their reputation or regulatory scrutiny. This article is a brief note on earnings management, and an attempt provide a perspective on how earnings management can be explained using a network typology.

Keywords: Financial Network, Earnings Management, Income Smoothing, Systemic Risk, Contagion, Network Fragility, Regulation, Reputation, Accounting Quality, Financial Institutions

Suggested Citation

Ozili, Peterson Kitakogelu, Earnings Management in Interconnected Networks: A Perspective (2017). Journal of Economic and Administrative Sciences Vol. 33 No. 2. Available at SSRN: https://ssrn.com/abstract=3038925

Peterson Kitakogelu Ozili (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Central Bank of Nigeria ( email )

Plot 33, Abubakar Tafawa Balewa Way
Central Business District, Cadastral Zone
Abuja
Nigeria

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