Ethical Companies and the Use of Earnings Management

• In Event: Financial Accounting (Earnings Management)

Abstract

The purpose of this study is to examine how U.S. firms that are listed on the Ethisphere Institute’s list of the world’s most ethical companies use earnings management. Previous literature reports conflicting findings on firms’ use of earnings management. Firms that employ transparent financial reporting are less likely to engage in earnings management (Friedman 1970; Kim et al. 2012). On the other hand, managers of firms may employ opportunistic financial reporting and are, therefore, more likely to engage in earnings management (Fritzche 1991). The results of our study support the opportunistic hypothesis. Further, when we test a matched sample of ethical and control firms, we find that firms in female-dominated industries use more real activities manipulation than control firms. Our study contributes to the literature that attempts to describe the behavior of managers at firms that purport to exhibit ethical financial reporting and practice corporate social responsibility.

Authors

• Mary Jane Lenard, Meredith College

• Karin Ann Petruska, Youngstown State University

• Pervaiz Alam, Kent State University

• Bing Yu, Meredith College