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Does earnings management matter for strategy research?

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Research reveals earnings management affects ROA analysis in companies, suggesting cash-based measures are more reliable.

Approximately 15% of observations in Compustat show earnings manipulation, affecting reported performance metrics.
Cash-based performance measures are less susceptible to manipulation than income-based ones, improving reliability.
Using earnings management methods, the analysis reveals its influence on two traditional profitability assessments, shaping strategic conclusions.
Results highlight the need for robustness testing in financial metrics, linking theoretical constructs to empirical performance.

Gibbs et al. (2025) studied this question.

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