Earnings Management (eBook)

Dr. Joshua Ronen, a leader in economic analysis, has more than 30 years of experience in economics, finance, accounting and research. He is Research Professor of Accounting at Stern School of Business, New York University, which he joned as a faculty member in 1973. From 1970 to 1974, he served on the faculty of the University of Chicago Business School. He received his BA in Accounting and Economics from the Hebrew University and his Ph.D. (1969) in Business Administration from Stanford University. He is also a licensed CPA in Israel and has practiced public accounting for seven years. Dr. Ronen has served or is serving on numerous journals, including The Accounting Review, The Journal of Accounting Research, Accounting, Organizations and Society, Review of Quantitative Finance & Accounting, Journal of Accounting and Public Policy, The British Accounting Review, The Journal of International Financial Analysis. He also served as Editor-In-Chief of the Journal of Accounting, Auditing and Finance.Dr. Varda Yaari is an Associate Professor at Morgan State University, Maryland, USA. 2002-2003: Senior Lecturer: Ben-Gurion University. 1998 – 2001: Lecturer: Ben-Gurion University. Coordinator of Accounting Area. Dr. Yaari received his Ph.D. in Philosophy in 1989 from the Stern School of Business, NYU and his Master of Arts (Economics), 1979 from Tel-Aviv University.

Contents 7
Introduction 12
The Demand for Earnings Management Research 13
Historical Perspective: The Milestones 15
The Plan of the Book 17
Acknowledgments 18
Part 1 20
1 The Importance of Earnings 22
1.1 The Dual Role of Accounting 23
1.2 The Value Relevance of Earnings 25
1.3 Summary 40
2 Definition of Earnings Management 42
2.1 Definition 42
2.2 The Methods to Manage Earnings 48
2.3 Managing GAAP Earnings Through Pro forma Earnings 51
2.4 Summary 55
Part 2 56
The Players 57
The Sarbanes-Oxley Act 59
The Plan of Part 2 69
3 The Management 72
3.1 Background 73
3.2 Compensation 84
3.3 CEO Turnover 108
3.4 Insider Trading 116
3.5 Management Buyouts 125
4 Users 128
4.1 Shareholders 129
4.2 Earnings Management Events 150
4.3 Bondholders and Other Creditors 171
4.4 Regulators 186
4.5 Employees 196
4.6 Competitors, Suppliers, and Customers 197
Appendix 199
5 Gatekeepers 201
5.1 The Demand for Gatekeepers 201
5.2 Analysts 205
5.3 Governance—Ownership 234
5.4 Governance—the Board of Directors 250
5.5 Auditors 277
5.6 The Press 295
Part 3 298
The Demand for Theory 299
The Plan of Part 3 301
6 Truth-Telling 305
6.1 Capital Markets 305
6.2 Governance 313
6.3 Product/Factor Markets 317
6.4 Regulation 323
Appendix: The Disclosure Principle 326
7 Smoothing 328
7.1 Capital Markets 330
7.2 Governance 339
7.3 Product Market Competition 344
7.4 Regulation 346
Appendix: Artificial Smoothing Motivated by Consumption Smoothing 347
8 Maximization and Minimization 352
8.1 Capital Market 354
8.2 Governance 364
8.3 The Competitive Environment 369
8.4 Regulation 372
8.5 Summary 377
Part 4 379
Accruals 380
The Plan of Part 4 384
9 The Accruals Process 385
9.1 Non-discretionary Accruals 385
9.2 The Effect of Earnings Management on Accruals 389
9.3 Accruals and Cash Flows 392
Appendix: Accruals when the Firm Carries Inventories 395
10 The Accruals Methodology 397
10.1 The Evolution of Accruals-Based Research 397
10.2 An Evaluation of the Jones Model 415
11 Modifications to the Jones Model and Alternative Methodologies 441
11.1 Improved Jones Models 441
11.2 Alternative Methodologies for Detecting Earnings Management 457
Summary and Postscript 465
Overview of the Book 465
Lessons 467
Related Research 468
Bibliography 470
Index 583