Unknown unknowns: knightian uncertainty andcorporate opportunistic earnings management

Abstract

Uncertainty is inherent in the real world. Faced with Knightian uncertainty caused by many extremeevents, this paper focuses on the analysis of corporate opportunistic earnings management behaviourunder the unknown unknowns framework. This paper finds that with an increase in market Knigh-tian uncertainty, corporations will significantly adopt both accrual earnings management and realearnings management. More importantly, when compared with upward earnings management, theresults indicate that Knightian uncertainty will lead corporations to implement more downward earn-ings management. Our results are consistent with the big bath theory, which is also verified throughthe adjustment of non-recurring profit and loss accounts. To understand the real process of earningsmanagement, we also discuss the strategic choice behaviour of earnings management under differentheterogeneous situations