Are Unmanaged Earnings Always Better for Shareholders?

The push for increased transparency in financial reporting and corporate governance serves shareholders only up to a point. The problem of assessing the value of transparency to shareholders is subtle because both the level and pattern of earnings can convey information. Even when earnings management conceals information, it can be beneficial to shareholders. Distinguishing between ex ante and ex post efficiency underscores the advantages of achieving a balance between transparency and privacy in corporations. It is noted that eliminating earnings management is an unattainable nirvana used only by politicians. Instead of trying to eliminate earnings management, it might be more useful to emphasize accounting properties that increase the value of managed accruals. Three such properties are examined.