Earnings management and market trust: what's the association?

Abstract

Financial communication is the bridge that links the relationship between the company and its stakeholders. The aim of financial communication is to present the company's true situation clearly, to propagate its reputation and to establish trust with its stakeholders. Earnings management appears to be a flexible practice, a weapon that depends on its user, the manager. The manager, who always has discretionary power, can make changes to financial reports. This calls into question the transparency of these reports, and consequently influences investor trust. In the wake of a succession of financial scandals, a crisis of trust is beginning to develop between stakeholders. As a result, legislation is steadily stepping in to restore this trust. In this article, we seek to analyze the relationship between earnings management and market trust, basing our theoretical model primarily on agency theory, stewardship theory and game theory.