“That earning management reduces transparency is a simplistic idea. A fundamental feature of decentralized organizations is the dispersal of information across people. Different people know different things and nobody knows everything. In such an environment, a managed earnings stream can convey more information than an unmanaged earnings stream. A smooth car ride is not only comfortable, but in also reassures the passenger about the driver’s expertise” (Arya, A., J.C. Glover, and S. Sunder, “Are Unmanaged Earnings Always Better For Shareholders?” Accounting Horizons, supplement 2003, p.111-112.). 

Required: 

Outline the argument as to why earning management by complex firm can provide useful and credible information to investors. What are some of the cost of opportunistic smoothing of earning?

Answer rating: 100% (QA)

Instead of trying to eliminate earnings management it might be more useful to emphasize accounting p... View the full answer