Cross‐Firm Real Earnings Management

Posted: 15 Aug 2018

See all articles by Eti Einhorn

Eti Einhorn

Tel Aviv University

Nisan Langberg

University of Houston - C.T. Bauer College of Business; Tel Aviv University - Coller School of Management

Tsahi Versano

Tel Aviv University, Coller School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2018

Abstract

Our analysis is rooted in the notion that stockholders can learn about the fundamental value of any firm from observing the earnings reports of its rivals. We argue that such intraindustry information transfers, which have been broadly documented in the empirical literature, may motivate managers to alter stockholders’ beliefs about the value of their firm not only by manipulating their own earnings report but also by influencing the earnings reports of rival firms. Managers obviously do not have access to the accounting system of peer firms, but they can nevertheless influence the earnings reports of rival firms by distorting real transactions that relate to the product market competition. We demonstrate such managerial behavior, which we refer to as cross‐firm real earnings management, and explore its potential consequences and interrelation with the practice of accounting‐based earnings management within an industry setting with imperfect (nonproprietary) accounting information.

Keywords: accounting; financial reporting; earnings management; real earnings management; nonproprietary information; product market competition; managerial myopia

JEL Classification: D82; M41; M43

Suggested Citation

Einhorn, Eti and Langberg, Nisan and Versano, Tsahi, Cross‐Firm Real Earnings Management (June 1, 2018). Journal of Accounting Research, Vol. 56, No. 3, 2018, Available at SSRN: https://ssrn.com/abstract=3224509

Eti Einhorn

Tel Aviv University ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Nisan Langberg (Contact Author)

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

Houston, TX 77204-6021
United States

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

Tsahi Versano

Tel Aviv University, Coller School of Management ( email )

P.O. Box 39040
Ramat Aviv Tel Aviv 69972, 6997801
Israel

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