Earning Management

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HUB RESEARCH PAPER
Earnings management: a literature review
S. Verbruggen, J. Christaens, and K. Milis
HUB RESEARCH PAPER 2008/14. FEBRUARI 2008

Hogeschool – Universiteit Brussel
Stormstraat 2, 1000 Brussel, Belgium T: +32 2 210 12 11 F: + 32 2 217 64 64

Earnings management: a literature review
S. Verbruggen, Hogeschool Universiteit Brussel Prof dr. J. Christaens, Universiteit Gent Prof. dr. K. Milis, Hogeschool Universiteit Brussel

Abstract Based on a literature review of major accounting journals, this paper attempts to offer a comprehensive overview of recent earnings management research and provide a critical classification of articles on the matter as well as a search for voids in current literature. A selection of leading journals was reviewed systematically from January 2000 onwards resulting in 145 articles examining ‘earnings management’. Each article was thoroughly screened in terms of research question, methodology and findings. The paper attempts to be in keeping with prior review articles from around the turn of the century (Healy and Wahlen 1999; Fields, Lys and Vincent 2001) and focuses on the latest evolutions given that earnings management remained a focal research topic. The study resulted in four research categories: motives for earnings management, earnings management techniques, restrictions to earnings management, and research design issues. In every category, main research conclusions as well as methodological issues are discussed. Screening and classifying earnings management literature did not only generate a structured overview of the work performed in this area, it also provided insights in some important voids, such as a focus on non-listed and small companies, ‘real’ earnings management and non-financial motives. Finally, this paper offers a systematic literature review and evidences that there is ample room for further research.

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1. Introduction Researchers (re)directing their focus to earnings management are confronted with an extent body of literature regarding the subject. Prior review articles such as those by Schipper (1989), Healy and Wahlen (1999) and Dechow and Skinner (2000) on earnings management and by Fields, Lys and Vincent (2001) on accounting choice have created structure in the enormous number of articles dedicated to the subject. McNichols (2000) has focused on design issues while reviewing recent literature. These prior review articles focused mainly on research done in the 1990’s. We extend this by examining the literature on earnings management in the early years of the new decade: January 2000September 2006. We selected 11 major accounting journals and screened them systematically on earnings management in title, abstract and/or author supplied keywords. As such, we read 153 articles focusing on or relating to earnings management. The articles are quite evenly spread over the entire period. This indicates that there is an continuous interest in this field of research. The articles deal with a variety of issues related to earnings management. We narrow this broad research area down into different categories to provide structure in the existing literature. This allows us to assess whether there is a shift in the research focus and to detect voids in current research. The remainder of the paper is organized as follows. In the next two sections we briefly discuss three prior review articles and our methodology (section 3). We discuss the first category (motives for earnings management) in section 4, followed by techniques of earnings management in section 5. How earnings management can be restricted is outlined in section 6. We discuss several research design issues in section 7. A summary concludes our paper. 2. Prior review articles Three important review articles from around the turn of the century serve as a basis for our research. Healy and Wahlen (1999) have reviewed earnings management literature in respect to the usefulness of prior research...
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