* I gratefully acknowledge helpful discussions with Susan Moyer, Mark Peecher, Terry Shevlin, D. Shores, and especially Bob Bowen, Dave Burgstahler, and Mark DeFond. Research Vol.13 No.l (Spring 1996) pp. 37-47 Â©CAAA Contemporary Accounting Contemporary Accounting Research Overview of eamings manipulation Incentives to manipulate The perspective taken in earnings management studies is that existing and potential contracts, both explicit and implicit, between stakeholders and the firm create incentives for managers to manipulate eamings. When the manipulation increases the wealth of the manager at the expense of other stakeholders, we say the manager has acted opportunistically (Watts and Zimmerman 1990, 135). Most studies of earnings manipulation take an opportunistic perspective in contrast to both the perspective that managers make accounting choices to provide better information about future cash fiows and the perspective that managers make accounting choices for efficiency reasons, that is, to minimize the firm's agency costs that arise from conflicts of interest among firm stakeholders (Christie and Zimmerman 1994). In the late 70s and early 80s, research focused on the "big three"âthe incentives created by debt covenants, compensation contracts, and the politicalregulatory process (see Table 1). Debt contracts typically use accounting numbers in covenants. If these covenants
Contemporary Accounting Research – Wiley
Published: Mar 1, 1996
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