Economic Effect of Tightening Accounting Standards to Restrict Earnings Management
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This article discusses the economic effect of tightening accounting standards to restrict earnings management. It explains how tightening accounting standards can decrease earnings management and provide relevant information about the capital market. The author distinguishes between real and accounting earnings management and describes how tightening accounting standards might lead to a substitution effect that increases real earnings management. The article also explores the equilibrium model and its consequences, as well as the effects of tighter accounting standards on the quality level and total cost of earning management. Finally, the author concludes that while tightening accounting standards can increase earning quality, it may also increase the cost of earning management and decrease the value of the firm.