Final answer:
Earnings management is generally false when it comes to making income statements more useful for predicting future earnings and cash flows, as it can manipulate financial information, misleading investors and analysts.
Step-by-step explanation:
The idea that earnings management generally makes income statement information more useful for predicting future earnings and cash flows is false. Earnings management can involve the manipulation of financial statements to present a more favorable picture of a company's financial health than is truly the case. This can mislead investors and analysts, who rely on accurate data to make investment decisions.
It is important for stock prices, as they are based on expectations about the future, that shifts in expectations will determine shifts in the stock price. Knowing the firm's managers and their business plans becomes less important as the firm becomes established because information becomes more widely available, enabling outside investors to rely on disclosed financial data. However, if earnings management distorts this data, it undermines investor confidence and the ability to accurately predict future performance.