Voluntary Disclosure and Earnings Management

• In Event: Financial Reporting, Regulation and Expected Returns

Abstract

Earnings management is generally conceived to be detrimental to firm value as well as detrimental to the informativeness of management earnings disclosure. A number of researchers as well as practitioners also call for proposals aimed at eliminating earnings management. In this paper, we show that earnings management can be beneficial in the sense that allowing managers the option to manipulate earnings could improve the information content of management voluntary disclosures. Thus there is a hidden benefit of allowing the manager some discretion in reporting the true earnings of the firm, consistent with the discretion imbedded in generally accepted accounting principles.

Authors

• Xu Jiang, Duke University

• Baohua Xin, University of Toronto