Is Earnings Management Opportunistic or Beneficial? An Agency Theory Perspective

25 Pages Posted: 20 Jul 2006 Last revised: 24 Oct 2008

See all articles by Pornsit Jiraporn

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Gary Miller

California State University, Bakersfield

Soon Suk Yoon

Chonnam National University - Department of Economics

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Abstract

Earnings management has been cast into negative light due to the recent corporate scandals and, therefore, is viewed as detrimental to the firm. Enron and WorldCom represent two of the most egregious cases of opportunistic earnings management that led to the largest bankruptcies in U.S. history. However, some argue that earnings management may be beneficial because it improves the information value of earnings by conveying private information to the stockholders and the public. We offer agency theory as a tool to distinguish between the opportunistic and beneficial uses of earnings management. The empirical evidence suggests that firms where earnings management occurs to a larger (less) extent suffer less (more) agency costs. Moreover, a positive relation is documented between firm value and the extent of earnings management. Taken together, the results reveal that earnings management is, on average, not detrimental.

Keywords: Earnings management, Agency costs

JEL Classification: G30, G34

Suggested Citation

Jiraporn, Pornsit and Miller, Gary and Yoon, Soon Suk and Kim, Young Sang, Is Earnings Management Opportunistic or Beneficial? An Agency Theory Perspective. International Review of Financial Analysis, 2008, Vol 17, 622-634.. Available at SSRN: https://ssrn.com/abstract=917941

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

Gary Miller

California State University, Bakersfield ( email )

9001 Stockdale Highway
Bakersfield, CA 93311-1099
United States

Soon Suk Yoon

Chonnam National University - Department of Economics ( email )

77 Yongbongro, Buk-gu, Gwangju
Seoul, 500-757
Korea, Republic of (South Korea)

Young Sang Kim (Contact Author)

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Economics and Finance
Highland Heights, KY 41099
United States
859-572-5160 (Phone)
859-572-6627 (Fax)

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