PHYSICS 102 Lecture Notes - Lecture 6: Credit Risk, Cash Flow, Earnings Management
Document Summary
Article 1: real earnings management and long-term operating performance: the role of. Earnings management: use of judgment in financial reporting and in structuring transactions to mislead stakeholders about performance of the company or to influence the contractual outcomes that depend on reported accounting numbers. Why there is an increased tendency to use rem by firms + prior research found varying effects of rem on future performance. Helps to clarify whether current proxies for rem capture earnings management, rather than efficient decision making. Investigates instances of more rapid reversals, provides additional evidence on the potential long-term consequences of rem. However, managers still engage in rem (cutting r&d and sg&a) as long as benefits of rem outweigh costs . Managers face trade off between rem and investing optimal amount. When engaging in rem incentive to reverse as managers are affected by consequences (firms but also managers themselves)
