Is earnings management opportunistic or beneficial? An agency theory perspective

Pornsit Jiraporn, Gary A. Miller, Soon Suk Yoon, Young S. Kim

Research output: Contribution to journalArticle

86 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)622-634
Number of pages13
JournalInternational Review of Financial Analysis
Volume17
Issue number3
DOIs
StatePublished - Jun 1 2008

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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