Earnings management is a term used in trading and investing to describe the practice of manipulating financial statements to make a company's financial performance appear better than it actually is. This is done to meet or exceed market expectations and boost the company's stock price. Earnings management can include a variety of techniques, such as selectively timing the recognition of revenues or expenses, using accounting methods that are more favorable to the company, or manipulating reserves and accruals.
Earnings management is controversial, as it can be seen as a form of dishonesty or fraud. In some cases, it may even be illegal. The Securities and Exchange Commission (SEC) closely monitors financial statements for signs of earnings management and can take legal action against companies that engage in the practice. While some argue that earnings management can benefit shareholders in the short term, in the long run it can undermine investor trust and lead to instability in financial markets.