Introduction

Abstract

Earnings management is hiding the truth in financial reporting by making some economic decisions, changing the accounting treatment of specific items, or using other sophisticated methods. Such behaviour happens due to the agency problem between managers and shareholders arising from the contracting costs, bounded rationalities, and information asymmetry between the two parties. Therefore, different motives may drive managers to manage earnings at the contracting, capital market and external levels; hence allowing them to extract some private benefits. Earnings management was the underlying reason for a number of financial scandals of large companies and ultimately resulted in the failure of those companies. Consequently, understanding earnings management behaviour is expected to have implications to the regulators, policy makers, shareholders, investors, academics, and some of the gatekeepers e.g., auditors and analysts.