An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Guojin Gong
Pennsylvania State University

Henock Louis
Pennsylvania State University

Amy X. Sun
Pennsylvania State University

Abstract: We analyze the effect of increased reporting transparency on earnings manipulation by examining the effects of mandated initiation of multi-segment reporting under SFAS No. 131 on firms’ earnings management activities. We find firms that initiate multi-segment reporting following the adoption of SFAS No. 131 report significantly less discretionary accruals. We find no evidence that firms compensate for the reduction in accrual management by increasing real activity management. Instead, we find strong evidence that the adoption of SFAS 131 also leads to a significant reduction in real activity management. The overall evidence is consistent with the conjecture that more transparent financial reporting reduces earnings manipulation. This suggests that recent efforts to increase reporting transparency are likely to succeed in curbing managers’ discretionary reporting behavior. It also helps to ease the concern that tightened accounting standards may induce greater real activity management.

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