Review of Quantitative Finance and Accounting

, Volume 15, Issue 4, pp 325–347 | Cite as

Information Asymmetry and Earnings Management: Some Evidence

  • Vernon J. Richardson


This paper conducts an empirical investigation of the relationship between information asymmetry and earnings management predicted by Dye (1988) and Trueman and Titman (1988). When information asymmetry is high, stakeholders do not have sufficient resources, incentives, or access to relevant information to monitor manager's actions, which gives rise to the practice of earnings management (Schipper, 1989; Warfield et al., 1995). Empirical results suggest a systematic relationship between the magnitude of information asymmetry and the level of earnings management in two different settings.

earnings management information asymmetry monitoring seasoned equity offerings 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Belsey, D.A., E. Kuh, and R.E. Welsch, Regression diagnostics Identifying influential data and sources of collinearity, New York, NY: Wiley, 1980.Google Scholar
  2. Bhattacharya, U. and M. Spiegel, “Insiders, Outsiders, and Market Breakdowns.” Review of Financial Studies 4, 255–282, (1991).Google Scholar
  3. Brown, L.D. and J. Han, “The Impact of Annual Earnings Announcements on Convergence of Beliefs.” The Accounting Review 67, 862–875, (1992).Google Scholar
  4. Chaney, P.K. and C.M. Lewis, “Earnings Management and Firm Valuation Under Asymmetric Information.” Journal of Corporate Finance: Contracting, Governance and Organization 1, 319–345, (1995).Google Scholar
  5. Christie, W.G. and P.H. Schultz, “Why Do NASDAQ Market Makers Avoid Odd-eighth Quotes?” Journal of Finance 49, 1813–1840, (1994).Google Scholar
  6. Dechow, P.M, R.G Sloan, and A.P. Sweeney, “Detecting Earnings Management.” The Accounting Review 70, 193–225, (1995).Google Scholar
  7. Defond, M. and J. Jiambalvo, “Debt Covenant Violation and Manipulation of Accruals.” Journal of Accounting and Economics 17, 145–176, (1994).Google Scholar
  8. Dye, R., “Earnings Management in an Overlapping Generations Model.” Journal of Accounting Research 26, 195–235, (1988).Google Scholar
  9. Glosten, L. and P. Milgrom, “Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders.” Journal of Financial Economics 14, 71–100, (1985).Google Scholar
  10. Guay, W, S.P. Kothari, and R. Watts, “A Market-based Evaluation of Discretionary Accrual Models.” Journal of Accounting Research 34, (Supplement), 83–105, (1996).Google Scholar
  11. Healy, P., “The Effect of Bonus Schemes on Accounting Decisions.” Journal of Accounting and Economics 7, 85–107, (1985).Google Scholar
  12. Healy, P., K. Palepu, and A. Sweeney, Causes and Consequences of Expanded Voluntary Disclosure. Working paper Harvard Business School, Boston, MA, (1995).Google Scholar
  13. Jiambalvo, J., Discussion of “Causes and Consequences of Earnings Manipulation an Analysis of Firms Subject to Enforcement Actions by the SEC”, Contemporary Accounting Research, Spring, 37–47, (1996).Google Scholar
  14. Jones, J., “Earnings Management During Import Relief Investigations.” Journal of Accounting Research 29, 193–228, (1991).Google Scholar
  15. Kasznik, R., “On the Association Between Voluntary Disclosure and Earnings Management.” Journal of Accounting Research 37, 57–81, (1999).Google Scholar
  16. Lev, B., “Toward a Theory of Equitable and Efficient Accounting Policy.” The Accounting Review 43, 1–22, (1988).Google Scholar
  17. Myers, S.C., “Still Searching for Optimal Capital Structure.” Journal of Applied Corporate Finance 4–14, (Spring 1993).Google Scholar
  18. Perry, S.E. and T.H. Williams, “Earnings Management Preceding Management Buyout Offers.” Journal of Accounting and Economics 18, 157–179, (1994).Google Scholar
  19. Rangan, S., “Earnings Management and the Performance of Seasoned Equity Offerings.” Journal of Financial Economics 50, 101–122, (1998).Google Scholar
  20. Schipper, K., “Earnings Management.” Accounting Horizons 3, 91–106, (1989).Google Scholar
  21. Shivakumar, L., Earnings Management Around Seasoned Equity Offerings, Unpublished dissertation. Vanderbilt University, Nashville, TN, (1996).Google Scholar
  22. Trueman, B. and S. Titman, “An Explanation For Accounting Income Smoothing.” Journal of Accounting Research 26, Supplement, 127–139, (1988).Google Scholar
  23. Watts, R. and J. Zimmerman, “Towards a Positive Theory of the Determination of Accounting Standards.” The Accounting Review 53, 112–134, (1978).Google Scholar
  24. Warfield, T.D, J.J. Wild, and K.L. Wild, “Managerial Ownership, Accounting Choices, and Informativeness of Earnings.” Journal of Accounting and Economics 20, 61–91, (1995).Google Scholar
  25. Welker, M., “Disclosure Policy, Information Asymmetry and Liquidity in Equity Markets.” Contemporary Accounting Research 11, 801–827, (1995).Google Scholar
  26. Zmijewski, M. and R. Hagerman, “An Income Strategy Approach to the Positive Theory of Accounting Standard Setting/Choice.” Journal of Accounting and Economics 3, 129–149, (1981).Google Scholar

Copyright information

© Kluwer Academic Publishers 2000

Authors and Affiliations

  • Vernon J. Richardson
    • 1
  1. 1.Division of Accounting and Information SystemsUniversity of KansasLawrence

Personalised recommendations