On the tension between full revelation and earnings management: A reconsideration of the revelation principle

The popular view that because of the revelation principle the research on earnings management must be restricted only to situations in which a truth-telling, fully revealing equilibrium does not exist is challenged. The revelation principle is presented and discussed, and conditions under which truth-telling equilibria may be dominated by equilibria wherein the message (such as earnings) is managed are stated. The revelation principle, which states that there is no loss of generality in restricting the analysis to a truth-telling, full-disclosure equilibrium, was invoked to address asymmetric information situations in which the truth is instrumental in the implementation off efficient allocations. The optimal message in an undominated equilibrium may involve either partial suppression of information (omission of some data) or aggregation (summarization of data).