Ethical Fading in Earnings Management: Why Stakeholder Salience Matters

• In Event: Ethical Reporting Decisions

Abstract

Recently researchers have noted that managers repeatedly engage in and rationalize costly real earnings management activities. Ethical fading, the propensity to frame ethical decisions as business decisions, might provide some insight into such inclinations. This study examines whether ethical fading underlies differences in ethicality judgments about real and accrual earnings management (real, accrual) and whether stakeholder salience minimizes such differences. One hundred five Masters of Business Administration (MBA) participants assessed the ethicality and likelihood of two accrual (one revenue increasing, one expense decreasing) and two real earnings management (one revenue increasing, one revenue decreasing) scenarios. In the absence of stakeholder salience, participants considered real earnings management to be less unethical than accrual earnings management and they were more likely to implement real earnings management. However, when the impact of employee layoffs (i.e., stakeholder salience) was made prominent, participants assessed the ethicality and likelihood of real earnings management and accrual earnings management in a similar manner.

Author

• Wendy J Bailey, Northeastern University