The informational and Strategic Impacts of Real Earnings Management

Abstract

We address the informational and strategic impacts of real earnings management (REM) in a two-period oligopoly model with one-sided information. For the strategic impacts of REM, once the demand falls short of expectation, a firm should raise the price instead of cutting it to reach the earnings target. For the informational impacts, to maintain opponents` uncertainty, the privately informed firm could conceal its identity by taking a mixed strategy and setting the first period price to be higher than in the separating equilibrium. Finally, the presence of tunnelling from cross-shareholding firm will enhance the price cut in the second period.