|dc.description.abstract||The definition of earnings management contains two elements: a departure from normal business practices and the use of deception to mislead stakeholders. For thirty years, accounting literature has conducted earnings management research with a narrowed definition including only the departure from normal business practices, judgement or estimates. In this study, I define deceptive earnings management as the act of deceiving stakeholders about the underlying economic performance of a company using managerial judgment. I differentiate between traditional and deceptive earnings management by testing the association between chief executive officer (CEO) and chief financial officer (CFO) deception and earnings management measures.
I find that CEOs and CFOs prefer different forms of deceptive earnings management. In addition, I find evidence supporting the use of deceptive earnings management by firms which are outside of the meet-or-beat earnings threshold. I further find a negative relationship between deception and abnormal production costs, suggesting deceptive executives have decreased production compared to non-deceptive executives. I find limited evidence associating the complexity of the annual report management discussion and analysis to the use of deception.
This study contributes to the accounting literature in several ways. First, I fill a gap as no other study has utilized textual analysis to operationalize managerial intent in relation to earnings management. Second, I differentiate between traditional and deceptive earnings management. This differentiation is important as the literature has utilized only the first part of the theoretical definition of earnings management, departure from normal business practices, for the past thirty years without testing for a deceptive managerial intent, the second part of the theoretical definition. Third, I investigate the relationship between CEOs and CFOs and their different preferences towards earnings management strategies. Finally, I find an association between executive deception and abnormally low production costs.||en_US