Are Unmanaged Earnings Always Better for Shareholders? Accounting Horizons 17 (Supplement

INTRODUCTION A lack of transparency in financial reports has often been cited as a weakness of capital markets. Numerous revelations of financial reporting shenanigans by publicly held firms have attracted intense political and media attention, of which Enron and WorldCom are two striking examples. Capital markets are alarmed at such news. The scandals in 2002 have attracted the attention of the securities regulators, accounting standard setters, Congress, and even the President to corporate earnings management. These guardians of shareholder interests can be too zealous, even for the good of their wards. The push for increased transparency in financial reporting and corporate governance serves the shareholders only up to a point. Beyond that, managerial inhibitions induced by a lack of privacy can damage the interests of shareholders. In other words, increasing transparency without limits does not necessarily improve corporate governance. For extreme example, installing monitoring c