Economic Effects of Tightening Accounting Standards to Restrict Earnings Management

Posted: 9 Jun 2005

See all articles by Ralf Ewert

Ralf Ewert

University of Graz - Institute of Accounting and Auditing

Alfred Wagenhofer

University of Graz

Abstract

This paper examines the usual claim that tighter accounting standards reduce earnings management and provide more relevant information to the capital market. We distinguish between accounting and real earnings management and assume that a standard setter can only influence accounting earnings management by the tightness of standards. In a rational expectations equilibrium model, we find that earnings quality increases with tighter standards, but we identify several consequences that may outweigh this benefit. First, managers increase costly real earnings management because the higher earnings quality increases the marginal benefit of real earnings management. Second, tighter standards can increase rather than decrease expected accounting and total earnings management. Third, the expected total costs of earnings management can also increase. We provide conditions for the occurrence of each of these effects.

Keywords: Accounting standards, earnings management, earnings quality, standard setting

JEL Classification: M41, M43, G14, D82

Suggested Citation

Ewert, Ralf and Wagenhofer, Alfred, Economic Effects of Tightening Accounting Standards to Restrict Earnings Management. Accounting Review, October 2005. Available at SSRN: https://ssrn.com/abstract=739245

Ralf Ewert

University of Graz - Institute of Accounting and Auditing ( email )

Universitaetsstr. 15/F1
Graz, A-8010
Austria
+43 (0) 316 380-3470 (Phone)
+43 (0) 316 380-9540 (Fax)

HOME PAGE: http://www.uni-graz.at/iuwp/

Alfred Wagenhofer (Contact Author)

University of Graz ( email )

Austria
+43 316 380 3500 (Phone)
+43 316 380 9565 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
3,592
PlumX Metrics