Microsoft Word 2007 ichrie conference Proceedings Final-Final 06-06-07. doc

LITERATURE REVIEW 
As the definition of earnings management states, managers use judgment in financial reporting and in 
structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic 
performance of the company or to influence contractual outcomes that depend on reported accounting numbers 
(Healy 1999).
The primary focus of earnings management research until recently has been to detect whether and when 
earnings management has taken place (Healy1999) and what would be motivations to manage earnings from the 
managements’ perspective. Furthermore, research by Healy (1999) provides evidences that some firms manipulate 
earnings to avoid reporting negative earnings, or earnings decline. Also, Burgsthler and Dichev (1997) observe that 
managers do emphasize the importance of increasing in earnings in the opening lines of the management discussion 
section of the annual report. A research by Carslaw (1988) and Thomas (1989) demonstrated that firms exercise 
discretion to increase earnings when the level of earnings or earnings per share is slightly below a round number.
Research articles directly discussing management’s earnings management based on external conditions 
such as recession have not been introduced in accounting literature. However, AlNajjar (2001) provides evidence 
that managers of multinational firms with a high level of the investment opportunity (economic boom) make 
accounting choices to reduce reported earnings compared to mangers of multinational firms with a low level of the 
investment opportunities. Additionally, Harris et al. (1994) argue that German mangers have incentives to manage 
earnings downwards to easily shape their dividend policies (Mora et al. 2005). Bitner (2005) also identifies that 
during dot.com period manipulating top-line growth became the method of choice for earnings management. Thus, 
there are evidences to make claims that earnings are managed in such a way to either increase or decrease based on 
the different economic conditions.
2
Commercial hotels make 54.5 % of their sales revenues from guest room rentals whereas gaming hotel generate much greater cash revenue 
from gaming operation. As a consequence, slot machines have become the greatest income generators in the gaming industry in the state of 
Nevada (Lucas 2003; Nevada Gaming Control Board 2000).

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