Earning Management

Disclosure Quality and Earnings Management

Gerald J. Lobo Arthur Andersen Professor of Accounting Department of Accountancy & Taxation Bauer College of Business University of Houston 334 Melcher Hall Houston, Texas 77204-6021

Jian Zhou Assistant Professor of Accounting School of Management SUNY at Binghamton PO Box 6000 Binghamton, NY 13902-6000 jzhou@binghamton.edu 607-777-6067 (Phone) 607-777-4422 (Fax)

Gerald J. Lobo, and Jian Zhou. 2001. “Disclosure quality and earnings management.” Asia-Pacific Journal of Accounting and Economics V8 (1): 1-20.

We acknowledge the helpful comments provided by Anwer S. Ahmed, Steve Fortin, Mary Harris, Kiridaran Kanagaretnam, Dong Hoon Yang, participants at the 2001 Asia-Pacific Journal of Accounting and Economics Symposium in Hong Kong, and workshop participants at Hong Kong Baptist University, University of Massachusetts at Boston, McGill University, and State University of New York – Binghamton. We extend a special thank you to the reviewer, Bin Srinidhi, for his many insightful comments and suggestions. We also thank Feixue Yan for help with data collection. Jian Zhou and Gerald Lobo acknowledge the financial support provided by the George E. Bennett Accounting Research Center and the School of Management Research Committee, respectively, at Syracuse University.

Disclosure Quality and Earnings Management

Abstract

This study examines the relationship between disclosure quality and earnings management. Corporate disclosure and earnings management are both subject to managers’ discretion; therefore, managers are likely to consider their interaction when exercising managerial discretion. This study employs a simultaneous equations model to test the hypothesis that disclosure quality and earnings management are negatively related. It uses ratings published by the Association for Investment Management and Research to measure corporate disclosure, and discretionary accruals from the modified Jones model to measure...