Earnings Management and Earnings Quality: Theory and Evidence
New York University
Abstract: We study a dynamic model of earnings management and provide predictions about the time-series properties of earnings quality and reporting bias. Our model distinguishes between two components of investor uncertainty: fundamental economic uncertainty and information asymmetry between the manager and investors due to reporting noise. We estimate the model to empirically separate these two components of investor uncertainty. We find that (i) the null hypothesis of zero reporting bias is rejected; (ii) the ratio of the variance of the noise introduced by the reporting process to the variance of earnings shocks is on average 45%, (iii) the reporting noise plays a significantly less prominent role in valuation, due to the persistence of shocks to economic earnings, (iv) the magnitude of investors' uncertainty created by reporting noise about firms' assets-in-place and about future earnings is similar; and (v) ignoring the possibility of reporting distortions would bias the estimates of variance and persistence of economic earnings.
Keywords: Earnings Management, Earnings Quality, Structural Estimation
Accepted: 08.31, 2018; Received: October 23, 2015
Article Citation: Anne Beyer, Ilan Guttman, and Iván Marinovic (2018) Earnings Management and Earnings Quality: Theory and Evidence. The Accounting Review In-Press.
执行编辑 | 中山大学南方学院 姚懿轩
审核编辑 | 万通
终审 | 西北师范大学 杨 阳