Earnings Management and IT Investments: An Examination of IT Infrastructure Development

In the context of IT infrastructure development, this paper empirically examines the relationship between IT investments and corporate earnings management. Our results suggest that earnings management undermines the firm’s capability of accomplishing its planned IT investments in infrastructure development. Strategic managers are also likely to manipulate IT infrastructure investments to achieve the goal of earnings management. We further examine how the relationship between IT infrastructure investments and earnings management is influenced by a key aspect of IT governance— decentralization of decision making. Our findings suggest that for firms with more decentralized IT infrastructure decisions, the negative impact of earnings management on the accomplishment of IT infrastructure investments is weaker and IT infrastructure investments are also less likely to be manipulated for the purpose of earnings management. In this regard, our study illustrates an important benefit of decentralized IT governance that has not been documented in the extant literature.