The Continuum From Legitimacy To Fraud Research Paper

The Continuum From Legitimacy To Fraud - Research Paper Example The archival research employs the use of secondary data, making it difficult to determine proxies for managing of earnings. Several models developed for this proxy are unable to distinguish accurately amid opportunistic behavior of managers and true performance. Another archival research limitation is the inability to tap the managers’ incentives into earnings management. This research type has founded its argument on economic theory in an attempt to explain the occurrence of earnings management (Cozby, 2009). It is hard to confirm beyond doubt that firms with the motivating factors such bonuses, debts covenants and political reasons undertake earnings management because of these factors. Behavioral researchers have tried to handle these shortcomings by giving proof of the behavior of earnings management, which has greater construct validity (implying easily to measure and define) than archival perspective. Several methods can detect and measure earnings management empirically . The most discretional method is the discretional accrual, which assumes that managers can depend on their discretional ability concerning some accruals to use as the proxy testing of earnings management (J. W. Creswell & J. D. Creswell, 2009). Another method is single accrual where only one of accrual types, say depreciation estimates, exists. This method is ineffective because of difficulty in establishing the exceptional accrual required to manage earnings. In the distribution method of earnings management testing, loss reporting is avoided (McKee, 2005).... Earnings Management Stimuli Motivation of capital markets The accounting information is useful in the capital markets in influencing the stock price in the interim, and for this reason, managers alter the information to influence their firms’ performance in the stock market. The key incentive for earnings management is to promote investment in a firm through purchase of shares in the capital market. Many firms post unanticipated positive accruals, which enhance prior to initial public offer (IPO) and acquisition financed by stock. These situations increase the use of earnings management to boost incomes, making them more viable than those of other firms (McKee, 2005). Past studies of firms indirectly concur with this argument by stating that ownership of lower institutions represented by interim oriented investments with much stress on stock prices over lasting gains. In opposition, some studies illustrate the inducement of understating earnings before a management buyout. Ron en and Yaari in their study support a hypothesis showing that unanticipated negative accruals depict a decreasing income, making the buyout cheaper and easier. This permits the management of a firm to propose a price that emerges as reasonably beyond the market price but beneath the actual worth of the firm. This market price does not show the real firm’s economics (Ronen & Yaari, 2011). Another motivation reason for capital markets is to show that the earnings of the firm have met the requirements of financial management or analysts. There are firms that hardly meet or surpass the forecast of a financial analyst; hence, the management alters the earnings upwards in order to satisfy the forecast (Trochim & Donnelly, 2008). Besides, firms should avoid loss making and