Is Earnings Management (Really) Rampant? Evidence from a Structural Model

37 Pages Posted: 16 Apr 2018 Last revised: 14 Dec 2019

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

University of California, San Diego (UCSD) - Rady School of Management

Edwige Cheynel

University of California, San Diego (UCSD) - Rady School of Management

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy

Ying Liang

CUNY Baruch College; City University of New York

Date Written: March 30, 2018

Abstract

We derive a measure of earnings management cost and the associated equilibrium level of earnings management from the cross-sectional properties of earnings and prices. This approach enables us to separate economic shocks from reporting discretion by modeling the economic trade-off faced by management. The trade-off can be easily estimated from a closed-form likelihood function. Overall, the estimates suggest that earnings management is modest, consistent with the conjecture in Ball (2013) that earnings management is not as rampant as what prior research would suggest. Consistent with prior studies, the measure suggests more earnings management during seasoned equity offerings, for smaller and growing firms, as well as in industries with more irregularities.

Keywords: earnings management; structural estimation; financial accounting; reporting; signalling; bias.

JEL Classification: D83; G14; M4

Suggested Citation

Bertomeu, Jeremy and Cheynel, Edwige and Li, Edward Xuejun and Liang, Ying, Is Earnings Management (Really) Rampant? Evidence from a Structural Model (March 30, 2018). Baruch College Zicklin School of Business Research Paper No. 2018-04-02. Available at SSRN: https://ssrn.com/abstract=3153047 or http://dx.doi.org/10.2139/ssrn.3153047

Jeremy Bertomeu (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Edwige Cheynel

University of California, San Diego (UCSD) - Rady School of Management ( email )

Edward Xuejun Li

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3235 (Phone)

Ying Liang

CUNY Baruch College ( email )

17 Lexington Avenue
New York, NY 10021
United States

City University of New York ( email )

695 Park Avenue
New York, NY 10021
United States

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