A Systematic Approach to the Motivations for Earnings Management: A Literature Review

Abstract

Earnings management literature attempts to understand why managers manipulate earnings. Our paper presents a review of growing body of literature on motivations for the earnings manipulation. In consequence, our objective is to provide an ample classification of the reasons. A selection of leading papers was reviewed systematically from 1985 to early 2019 resulting in 383 articles. The results of the paper are important for both theoretical and empirical researches on the earnings management. For one side, we offer a theoretical discussion on the incentives and factors; on the other side, the paper aims to highlight recent progresses in the field. Screening, classifying and systematic review of earnings management literature do not only generate a structured overview of the work performed in this area during more than thirty years, but it also provides insights for further research. Our findings confirm that earnings management topic remains a fertile ground for academic research. Second, although there are many possible motives for managing earnings, the spotlight has been mainly on those incentives that are related to the stock market. Third, in terms of the factors and characteristics of the environment, the impact of institutional factors (investor protection, ownership concentration, legal enforcement) is especially accentuated by the authors. Finally, our research confirms that there are still many other opportunities to research. Therefore, in the last section we identify potential line of investigations.

Firm-specific investor sentiment and earnings management: evidence from Brazil

“…Despite a wide range of motivations for earnings management practices, market-based incentives stand out (Callao et al, 2021). Stock offerings, such as IPOs and SEOs, can be good examples of specific events in the capital market that can trigger earnings manipulation activities by the companies' managers, who aim to optimize fundraising (Rangan, 1998;Teoh et al, 1998).…”

“…Moreover, according to the literature, managers may decide to manipulate their companies' earnings to respond to various stimuli originating in the capital market, so that earnings management decisions can be made to meet the expectations of investors, analysts, and other agents (Callao et al, 2021). Some of these market-based incentives are stock offerings (Rangan, 1998;Teoh et al, 1998), beating analysts' forecasts (Payne and Robb, 2000) and stock overvaluation (Chi and Gupta, 2009).…”

“…Despite a wide range of motivations for earnings management practices, market-based incentives stand out (Callao et al. , 2021).…”

“…Moreover, according to the literature, managers may decide to manipulate their companies’ earnings to respond to various stimuli originating in the capital market, so that earnings management decisions can be made to meet the expectations of investors, analysts, and other agents (Callao et al. , 2021).…”

Earnings and discretionary accruals

“…Dechow et al (1995), Kasznik (1999), Larcker and Richardson (2004), Kothari et al (2005), and Dechow et al (2003) all indicate that when commonly used discretionary accrual proxies (e.g., modified Jones model abnormal accruals, and forward-looking model abnormal accruals) are used, earnings increase. The problem arises as a result of directors' discretionary flexibility being misused (Callao et al, 2021). Hence, this study aims to measure the earnings management of the firm using different models through discretionary accruals since discretionary accrual is considered a better proxy for earning management.…”