Review of Accounting Studies, 3, 35–40 (1998) ° c 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands. Discussion of “Earnings Management and the Revelation Principle” AMIR ZIV email@example.com Graduate School of Business, Columbia University, New York, NY 10027 Arya, Glover, and Sunder (AGS) contribute to the earnings management literature along two dimensions. First, they classify existing explanations for earnings manipulation, based on the assumption of the revelation principle that is violated. Second, they introduce a model where allowing a manager to manipulate earnings serves as a commitment device. They show that both the owners and the manager can beneﬁt from earnings management (a Pareto improvement). My discussion ﬁrst deals with the general phenomenon of earnings management and then with the speciﬁcs of the AGS model. The stated goal of ﬁnancial reporting is to provide information for decision making pur- poses. Decision makers are not a homogeneous group, and in particular, include both insiders and outsiders, who may have different informational needs (see Beaver, 1998). An accounting system cannot disclose all possible relevant information. Financial statements can contain only an aggregated summary of the large number of transactions that have ac- tually occurred during the period. As a result,
Review of Accounting Studies – Springer Journals
Published: Oct 6, 2004
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