Summary of the Literature Review of Earning Management

Summary of the Literature Review on Earning Management

There are multiple of studies regarding earning management. Earnings are viewed as profits of a company. Basically, most of the studies highlight the intentions of firms carry out earning management as well as when and how it occurs. There are many reasons firms conduct earning management that are showed in different studies. Also, there are also studies that investigate the perception towards earning management by shareholders and non-shareholders of a company based on the intention of earning management whether it is individual managerial benefit or company benefit. For instance, based on Kaplan, 2001 studies show that we cannot presume that non-shareholders always perceive earning management as unethical and the shareholders’ view are depend on the intent of earning management. Besides, there are studies that highlight the trade-offs related to research design used in earning management such as McNichols, 2000. Furthermore, in the studies of Healy (1985), DeAngelo (1998), Jones (1991) and Dechow, Sloan and Sweeney (1995) reviewed that accrual-based models can be used to identify earning management in firms. However, in Dechow et al (1995) studies showed that the accrual-based models has disadvantage to detect earning management as these models all created test of low power for earning management of economically plausible magnitudes.

According to Healy and Wahlen (1999) studies reviewed the earning management literature and its connotations for standard settings. Their studies stated “earning management” takes place when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers (Healy and Wahlen, 1999, p.365). Furthermore, the also discovered the disadvantage of accrual-based model in...