Performance, Growth and Earnings Management

By Chi-Wen Jevons Lee, Laura Yue Li, Heng Yue. 2006

196 citations recorded by the source corpus.

We study the relationship between the amount of managed earnings and firms’ earnings performance and expected growth in a reporting model, where managers manipulate earnings to influence the valuation of firms’ equity while bearing a cost that is increasing and convex in the amount of managed earnings. In the unique revealing equilibrium to the model, firms with higher performance and growth over-report earnings by a larger amount because price responsiveness increases with earnings performance and growth. And earnings quality, defined as the proportion of true economic earnings in total reported earnings, increases with earnings performance but decreases with earnings growth. We conduct empirical tests on a large sample and a restatement sample using different proxies for earnings management. Results from the large sample tests support our predictions while results from the restatement sample tests are mixed. Our study provides an alternative explanation to the positive relationship between discretionary accruals estimated from the Jones model and firms’ performance and growth.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/385c8ddf64d3f593c5f7ad27fd6b9876cd7df2bf

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Strategy and Management

Citations in the corpus

Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences (2010, background): “Lougee and Marquardt (2004), for example, find that concurrent disclosure of non-earnings information improves the earnings-returns relation for firms with poor earnings informativeness.”
Product market power, industry structure, and corporate earnings management (2013, background): “We include two proxies for firm growth because such firms may face greater capital market pressure to manipulate their earnings (Lee et al., 2006), namely, growth and market-to-book ratio.”
Earnings Management within Multinational Corporations (2018, methodology): “Because accruals are likely related to firm growth and growth opportunities (e.g., Lee et al., 2006), we include sales growth (SALES_GWT) measured as the annual percentage change in sales.”
Board Interlocks and Earnings Management Contagion (2013, methodology): “We discuss next the set of control variables associated with earnings management and restatements from the literature (e.g., Lee et al. 2006; Lennox and Pittman 2010).”
Do CFOs Have Style? An Empirical Investigation of the Effect of Individual CFOs on Accounting Practices* (2011, background): “Growth firms may face greater capital market pressure to overreport their earnings (Lee et al. 2006); therefore, we include two controls for growth: the book to”