tailieunhanh - The optimal level of earnings management deterrence

The social welfare costs of earnings management have been known to include the distortion of real investment decisions (resulting in inefficient allocation of resources), as well as deadweight loss incurred by the firms to manage earnings. One of the ways used to mitigate the effect of these costs is increasing the level of earnings management deterrence through legislation, regulation and enforcement, as in the Sarbanes-Oxley Act. | http Accounting and Finance Research Vol. 8 No. 1 2019 The Optimal Level of Earnings Management Deterrence Michael Ehud Yampuler1 1 Department of Accounting and Taxation . Bauer College of Business University of Houston Main Campus Houston Texas United States Correspondence Michael Ehud Yampuler Department of Accounting and Taxation . Bauer College of Business University of Houston Main Campus Houston Texas United States Received November 15 2018 Accepted December 11 2018 Online Published December 14 2018 doi URL https Abstract The social welfare costs of earnings management have been known to include the distortion of real investment decisions resulting in inefficient allocation of resources as well as deadweight loss incurred by the firms to manage earnings. One of the ways used to mitigate the effect of these costs is increasing the level of earnings management deterrence through legislation regulation and enforcement as in the Sarbanes-Oxley Act. However by analyzing a rational expectations equilibrium that includes firms investors standard-setters and legislators I find that there are situations where such an increase in the level of earnings management deterrence may well be counter-productive. When considering the informational benefits of managing earnings and the substitution effect of accrual-based earnings management with real earnings management increasing deterrence may result in decreasing the information value of financial reporting as well as increasing total social welfare costs of earnings management. Keywords accrual-based earnings management real earnings management Sarbanes-Oxley Act information value of financial reporting 1. Introduction The social welfare costs of earnings management have been known to include the distortion of real investment decisions resulting in inefficient allocation of resources as well as deadweight loss incurred by the firms to manage earnings.