Question

What is it referred to when managers exercise judgement for the purpose of hiding true performance in order to either influence the stock performance, to benefit from the contractual terms between the firm and managers, or to influence regulatory decisions?

A) Financial Accounting
B) Signaling
C) Efficient Contracting
D) Earnings Management
E) None of the above

Answer 1

The practice where managers manipulate financial information to mask a company's actual performance is known as Earnings Management. This can erode corporate governance and affects the transparency needed for outside investors to make informed decisions.

Step-by-step explanation:

When managers exercise judgement to obscure the true performance of a company for personal gain or to influence the stock performance, regulatory decisions, or to benefit from contractual terms, it is referred to as Earnings Management. This practice can undermine corporate governance, which is the system responsible for overseeing the actions of top executives within a company. As firms grow and information regarding their products, revenues, costs, and profits becomes more publicly accessible, the importance of personal knowledge of individual managers' business plans diminishes. Consequently, outside investors, including bondholders and shareholders, may be more willing to provide financial capital to the firm, relying on available information rather than personal interactions.