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How Pervasive Is Earnings Management? Evidence from a Structural Model

Author

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  • Jeremy Bertomeu

    (Olin Business School, Washington University, St. Louis, Missouri 63130)

  • Edwige Cheynel

    (Olin Business School, Washington University, St. Louis, Missouri 63130)

  • Edward Xuejun Li

    (Zicklin School of Business, Baruch College, City University of New York, New York 10010)

  • Ying Liang

    (Robinson School of Business, Georgia State University, Atlanta, Georgia 30303)

Abstract

Although researchers often view earnings management as being widespread, measuring the cost and level of earnings management is a nontrivial task. We derive a measure of earnings management cost and the associated equilibrium level of earnings management from the cross-sectional properties of earnings and prices. This approach enables us to separate economic shocks from reporting discretion by modeling the economic tradeoff faced by management. The tradeoff can be easily estimated from a closed-form likelihood function. Consistent with prior studies, the measure suggests more earnings management during seasoned equity offerings, for smaller and growing firms, as well as in industries with more irregularities.

Suggested Citation

  • Jeremy Bertomeu & Edwige Cheynel & Edward Xuejun Li & Ying Liang, 2021. "How Pervasive Is Earnings Management? Evidence from a Structural Model," Management Science, INFORMS, vol. 67(8), pages 5145-5162, August.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:8:p:5145-5162
    DOI: 10.1287/mnsc.2020.3717
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    References listed on IDEAS

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