On the Tension between Full Revelation and Earnings Management: A Reconsiderastion of the Revelation Principle

Abstract

We challenge the popular view that because of the revelation principle, the research on earnings management must be restricted only to situations in which a truth-telling, fully revealing equilibrium/i> does not exist. After presenting and discussing the revelation principle, we state conditions under which truth-telling equilibria may be dominated by equilibria wherein the message (such as earnings) is managed. The optimal message in an undominated equilibrium may involve either partial suppression of information (omission of some data) or aggregation (summarization of data).