Essays on earnings management

Financial accounting standards permit managers to exercise discretion on reporting therefore provide space for earnings management. Managers can strategically manipulate earnings to affect perceptions of other stakeholders. Earnings management has been an active research field in accounting for decades. Recent scandal of Enron and Worldcom raised public concern about earnings management activities. My dissertation addresses two issues about earnings management.; My first essay investigates the relationship between timeliness and earnings quality. Timeliness and earnings quality are two essential qualitative properties incorporated in GAAP. However managers can affect them by exercising discretion on reporting dates and accruals. The literature has documented systematic behavior in timing and accruals as independent phenomena, and found significant market reactions to each. In this study, we examine the timing and accruals as a joint phenomenon and finds significant interaction between them. Our study also shows that the market assessment of earnings quality is affected by the timeliness of disclosure. The information relevance of earnings quality and earnings performance is associated with disclosure timing. The evidence indicates that report timing and accrual adjustments are joint disclosure strategy. Hence, timeliness and earnings quality should be considered as a joint issue in the deliberation of GAAP.; My second essay examines the effects of firm performance and growth on managers' decision of earnings management. We construct a simple model in which the market's price mechanism and managers' choice of earnings management are determined simultaneously. In the equilibrium, the level of earnings management increases with reported earnings and future growth, while the proportion of earnings managements in reported earnings decreases with reported earnings and increases in future growth. The model also predicts that the value relevance of earnings, as measured by the coefficients of price regress on earnings, increases with reported earnings and future growth. In the extension, we introduce uncertainty about the costs of earnings management into the basic model. Under this setting, the variance of earnings management increases with reported earnings and future growth. We empirically test those propositions and find strongly supporting results. Our study explicitly relates earnings management with firm performance and future growth and provides a new explanation to why discretionary accruals estimated from Jones (1991) model are related to firm performance and future growth as documented in Dechow, Sloan and Sweedney (1995) and McNichols (2000).