Investopedia explains 'Earnings Management'
Companies use earnings management to smooth out fluctuations in earnings and/or to meet stock analysts' earnings projections. Large fluctuations in income and expenses may be a normal part of a company's operations, but the changes may alarm investors who prefer to see stability and growth, tempting managers to take advantage of accounting gimmicks. Also, a company's stock price will often rise or fall after an earnings announcement, depending on whether it meets, exceeds or falls short of expectations.
Management can feel pressure to manipulate the company's accounting practices and, consequently, its financial reports in order to meet these expectations and keep the company's stock price up. If earning management is considered excessive, the SEC may issue fines as a punishment, but it still can be difficult for investors to identify the companies misrepresentations.
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