Impact of Earning Management on Financial Market and Society
The impact of earning management highly depends on the rationale of the management toward such activities. On one end, earning management is product of sincere attempt to reduce “noise” in business. On another extreme, earning management can be abused and employed to deceive and create faulty prospect of the company. As Wall Street expectation becomes more powerful, companies that fail to meet the expectation of the market tend to experience sharp fall in stock price. ... Consistently meeting and beating market expectation through earning management technique help company’s stockholder reduce volatility of stock price. There is empirical evidence that of 358 companies in Standard & Poor’s 500, companies that smoothen their earning have lower beta and higher market value (Journal of Business Finance and Accounting Dec 95 v22, Michelson, 1995).