ACCO 340 Lecture Notes - Lecture 11: Earnings Management, Accrual
2 Feb 2017
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Document Summary
Managers may use earnings management to meet analysts" forecasts, thereby avoiding the reputation damage and strong negative share price reaction that quickly follows a failure to meet investor expectations. Management may also use earnings management to report a stream of smooth and growing earnings over time. Thus, earnings management can be a vehicle for the communication of management"s inside information to investors. If the latter is being done, earnings management can be useful from a financial reporting perspective. Too much earnings management, however, can reduce the usefulness of financial reports for investors, especially if it is not disclosed. The use of earnings management is motivated by efficient markets and by contracts. Earnings management includes both accounting policy choices and real actions. So even more earnings management is needed if the reporting of losses is to be further postponed. Can manage earnings through advertising, r&d, timing of purchases and disposals of capital assets.
