Relationship between Information Asymmetry, Financial Nature and Real Earnings Management

Reducing an information asymmetry between the management and the external information users would be one of ways to improve quality of financial information in corporations. Such an information asymmetry can be likely associated with real earnings management of a corporation. In addition, corporations recently often perform their earnings management through real activities since they experience difficulties in earnings management through accruals. This likely occurs more often in corporations with high information asymmetry. Thus, this study analyzed the associations between information asymmetry and real earnings management using the Bayesian Network. For analysis, this study presented the Makov blanket, which is a set of the least variables, that affects the information asymmetry, and verified an association between information asymmetry and real earnings management through sensitivity analysis reflecting complicated real world based on the causal relationship derived here. Further, the existing studies related to information asymmetry and real earnings management were analyzed through multiple regression analysis. However, there has been a limitation in that the outcomes from these analyses do not reflect real world since they assume linearity between explanatory and dependent variables. Therefore, this study aims to identify the associations among variables using the Bayesian Network and to verify the interdependency among such variables as well. The findings of this study will be useful for any supervisory agency who pays attention to transparency of corporation financial information in either performing effective supervising role to corporations or improving the quality of financial information of corporations. Moreover, this study presented an association between information asymmetry and real earnings management and it will be a useful reference when a supervisory agency modifies the policy or system that improves a transparency of financial information.