How Pervasive Is Earnings Management? Evidence from a Structural Model
Jeremy Bertomeu, Edwige Cheynel, Edward Xuejun Li, Ying Liang
Management Science · 2021 · Volume 67 · Issue 8
Abstract
Although researchers often view earnings management as being widespread, measuring the cost and level of earnings management is a nontrivial task. 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 tradeoff faced by management. The tradeoff can be easily estimated from a closed-form likelihood function. 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. This paper was accepted by Suraj Srinivasan, accounting.
Keywords
earnings management, structural estimation, financial accounting, reporting, signaling
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