Is Earnings Management Sensitive to Discount Rates?

We argue that managers’ choice to manage earnings depends on the trade-off in the present value of expected future net benefits associated with that choice. Specifically, we examine if discount rates are associated with the likelihood that managers engage in earnings management to meet or beat various earnings targets. We find that discount rates are positively associated with income-increasing earnings management. This means that managers increase both accrual-based and real earnings management when discount rates are higher. However, the economic magnitude of this association is relatively moderate.

Keywords: Earnings Management, Accruals, Real Activities Manipulation, Discount Rates

Suggested Citation: Suggested Citation

Haga, Jesper and Ittonen, Kim and Tronnes, Per and Wong, Leon, Is Earnings Management Sensitive to Discount Rates? (March 15, 2018). Journal of Accounting Literature Volume 41, Pages 75-88. Doi.org/10.1016/j.acclit.2018.03.001., Available at SSRN: https://ssrn.com/abstract=3141065