Opportunistic Behaviour, Signalling Mechanism and Efficient Contracting: A Survey of Earnings Management

Earnings management is an issue that directly affects the over all integrity of financial reporting and significantly influences resource allocation in an economy. This paper provides a selective review of earnings management studies based on a financial economics framework of information asymmetry and agency costs. This paper also reviews the development of research focus in earnings management studies, in particular, this paper focus on two competing perspectives, managerial opportunistic behaviour and information signalling mechanism to characterise much of the research in this area. We particularly highlight that earnings management is not necessarily an opportunistic behaviour but could be a signalling mechanism to improve efficiency. This paper concludes that the limitation of current research in this field is lack of theoretical guidance and lack of consistency and integration among different research perspectives. The future direction for this area research, therefore, is to reconcile the competing perspectives, evoking a multi-research approach, and calling for a return to work in economic fundamental theories.