In emerging markets, policies for preventing and managing financial crises should be understood following the standard open economy macroeconomics text treatment. This, however, will prevent us from fully comprehending how to deal with these crises. To deal with financial crises in emerging markets, this paper brings about more promising theoretical tools borrowed from the interdisciplinary field of optimal policy design. It also considers the possibility that more than one market failure may occur simultaneously. The theoretical tools discussed here should serve to improve existing prevention and management policies.
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An extensive body of accounting literature is devoted to earnings management, broadly defined as the opportunistic exercise of managerial discretion that causes reported earnings to differ from earnings that would have resulted from a neutral application of generally accepted accounting principles (e.g., Dechow and Skinner 2000). Most studies in this line of research, however, have focused on firms’ motives to engage in, and the detection and quantification of, upward earnings management. We extend prior earnings management research by considering downward earnings management, a topic less thoroughly explored in the accounting literature relative to upward earnings management. Specifically, we investigate the relation between the motives for, and the ensuing strategies to accomplish, downward earnings management. Our research thus contributes to a more complete understanding of earnings management activity.
The relative scarcity of research examining downward earnings management is somewhat surprising in light of concerns expressed by regulators. For example, former SEC Chairman Levitt, in his widely cited “numbers game” speech (Levitt 1998), made explicit the SEC’s concerns that earnings management raises questions about the integrity of financial reporting. Relevant to our setting, Levitt highlighted five common “accounting gimmicks,” of which three were examples of downward earnings management. (Also see Turner 1999.)
