Management Accounting Section Midyear Meeting

The Joint Effect of Justification and Uncertainty on Real Earnings Management

• In Event: Targets and Real Earnings Management

Abstract

The recent growth in real earnings management (REM) is of significant concern because REM is intended to mislead stakeholders and is not easily detected or curbed. It is reasonable to expect REM to decline when managers are asked to justify their decisions to stakeholders, but the prevalence of uncertainty may render justification ineffective. We use an experimental economics method to examine the interactive effect of justification and uncertainty on the operating decisions of managers. We find that the opportunity to justify an operating decision has the effect of increasing REM-type decisions when heightened uncertainty surrounds future project outcomes. Some managers use uncertainty to justify their decisions by communicating reasons that make them appear accountable to the owners. We also find that many of our managers show concern for the owners and are not the self-interested profit maximizers. Overall, our results are consistent with the theory of prosocial behavior by Bénabou and Tirole (2006).

Authors

• Hong Qu, Kennesaw State University

• Lucy Ackert, Kennesaw State University

• Dana R. Hermanson, Kennesaw State University

• Velina Krastimirova Popova, Kennesaw State University