Earnings Management to Exceed Thresholds

Abstract

Earnings provide important information for investment decisions. Thus executives—who are monitored by investors, directors, customers, and suppliers—acting in self‐interest and at times for shareholders, have strong incentives to manage earnings. We introduce behavioral thresholds for earnings management. A model shows how thresholds induce specific types of earnings management. Empirical explorations identify earnings management to exceed each of three thresholds: report positive profits, sustain recent performance, and meet analysts' expectations. The positive profits threshold proves predominant. The future performance of firms suspect for boosting earnings just across a threshold is poorer than that of control group firms.