A Critical Realist Perspective on Earnings Management

Prior studies have provided little evidence of earnings management activities although research designs have included the widespread use of strong incentives to manage earnings; i.e., a widespread approach in the earnings management literature is to first identify conditions in which managers’ incentives to manage earnings are likely to be strong, and then test whether patterns of earnings management are observable. Furthermore, the evidence provided by prior studies is often conflicted on what motivates managers to manage earnings. This chapter shifts away from the contradictory conclusions drawn on the causes of earnings management presented by prior positivist research (discussed in Chap. 2). It introduces critical realism as an alternative to the positivist philosophical perspective to investigate the earnings management phenomenon. Finally, it provides a critical realist evaluation of mainstream earnings management literature and related incentives (or identified causes) that have been proposed by prior studies for managing earnings.