Information Asymmetry and Earnings Management: Some Evidence

This paper conducts an empirical investigation of the relationship between information asymmetry and earnings management predicted by Dye (1988) and Trueman and Titman (1988). When information asymmetry is high, stakeholders do not have sufficient resources, incentives, or access to relevant information to monitor manager's actions, which gives rise to the practice of earnings management (Schipper, 1989; Warfield et al., 1995). Empirical results suggest a systematic relationship between the magnitude of information asymmetry and the level of earnings management in two different settings.