Earnings manipulation, manager's compensation and reputation concerns

This paper analyzes the effects of manager's compensation and reputation concerns on earnings manipulation. I develop a model of earnings reporting in which a privately informed manager trades-off incentives to manipulate earnings to increase his current compensation against incentives to be honest to improve his reputation.;In equilibrium the manager manipulates earnings, but not enough to make reports uninformative. He lies with positive probability when underlying earnings are low, but he reports the truth when underlying earnings are high. The model also predicts that earnings manipulation is stronger when (i) underlying earnings are more volatile; (ii) and managers are closer to retirement. The pattern of earnings manipulation is independent of how sensitive the manager's compensation is to reported earnings. Finally, earnings manipulation and accounting discretion have a bell-shaped relation: increasing discretion when it is low, leads to more earnings manipulation, and vice-versa. These results are robust to different compensation schemes and the inclusion of an accruals' constraint.