ABSTRACT
Archival and behavioral research suggests that discretionary accruals are managed to increase bonuses when the risk of being discovered is lowest. While such strategic behavior has been suggested in past research, this study experimentally manipulates two important situational variables (monitoring of discretionary accruals and firm performance relative to a specific bonus range) to provide more direct evidence of such behavior. Further, we investigate whether knowledge of how to manage earnings strategically is learned tacitly over time through experience in a series of three studies. While more experienced participants in study 1 acted more strategically than less experienced participants, it is difficult to say that this is due to tacit knowledge rather than another variable that is related to experience in the same way as tacit knowledge. To further clarify this point, we performed study 2 to establish that novices do not behave strategically the way experienced participants do, and our results bear this out. To better understand what drives this result, we collected a third set of data on risk perceptions. The underlying argument for the use of this measure is that tacit knowledge about earnings management is actually knowledge about when the benefits to acting strategically will be greater than the potential risks. Again, results support our expectation in that more experienced participants appear to recognize the potential benefit of upward earnings management, but only in the no monitoring condition where the potential risk of getting caught is low.
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