The Bright Side of Earnings Management

Posted: 16 Aug 2018 Last revised: 22 Dec 2022

See all articles by Vivian W. Fang

Vivian W. Fang

European Corporate Governance Institute (ECGI); Indiana University

Renhui Fu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Date Written: December 4, 2018


This paper demonstrates the usefulness of earnings management in correcting stock underpricing. We find that underpricing, measured using mutual fund fire sales or the 2003 trading scandal as a shock, increases the likelihood of firms meeting or marginally beating analyst forecasts. Firms beat earnings targets by cutting R&D as well as making income-increasing reporting choices, but lean towards R&D reduction if reporting manipulation becomes costly. While both types of manipulation accelerate price reversal after fire sales, firms cutting R&D underperform those using accruals in the long-run. These results suggest that reporting discretion can sometimes be desirable to avoid real consequences.

Keywords: Earnings Management, Real Manipulation, Reporting Manipulation, Mutual Funds, Fire Sales, Fire Purchases, Sarbanes-Oxley Act of 2002, Mutual Fund Trading Scandal of 2003

JEL Classification: G01, G11, G23, G34, M41

Suggested Citation

Fang, Vivian W. and Fu, Renhui, The Bright Side of Earnings Management (December 4, 2018). Available at SSRN: or

Vivian W. Fang (Contact Author)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Indiana University ( email )

Bloomington, IN 47405
United States
47405 (Fax)

Renhui Fu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
+862152301575 (Phone)

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