Healy 1985

1
Healy (1985)
Bonus
L Bogey
U Cap
NI
2
Firms with bogeys and caps
3
Firms with only bogeys
4
The good side of earnings management

• Helps in revealing inside information
• Ronen and Sadan Managers want current periods
  earnings to be a good forecast of next period
  earnings.
• Blocked communication Managers have expert
  information that they cannot convey to
  shareholders. Earnings management is an indirect
  way to do so.

5
Patterns of earnings management

• Big bath
• big negative charges, designed to improve
  accruals in future years, e.g., AOL.
• Income smoothing
• try to make sure that there are no sudden sharp
  increases or decreases in earnings (earnings
  follows a smooth trend)