Two well-known stylized facts on earnings management are that the earnings surprise distribution has a discontinuity at zero, and that positive earnings surprises are associated with positive abnormal returns. We link these two facts in a model of the earnings management decision in which the manager trades off the capital market benefits of meeting earnings benchmarks against the costs of manipulation. We develop a new structural methodology to estimate the model and uncover the unobserved cost function. The estimated model parameters yield the percentage of manipulating firms, magnitude of manipulation, noise in manipulation, and sufficient statistics to evaluate proxies for identifying firms suspected of manipulation. Finally, we use the Sarbanes–Oxley Act as a policy experiment and find that by increasing costs, the Act reduced equilibrium earnings management by 36%. This reduction occurred despite an increase in benefits, consistent with the market rationally becoming less skeptical of firms that just meet benchmarks.

To mitigate holdup by an informed incumbent lender, a private borrower may publicly share information in order to increase lender competition. Despite proprietary costs, a subset of private borrowers voluntarily share private information in loan and credit underwriting agreements. These borrowers switch lenders at a 16% higher rate and receive lower loan financing costs. For private firms that go public, we analyze changes in the net benefits of information sharing and study the potential estimation bias from unobservable borrower quality. This setting corroborates our inference that voluntary information sharing reduces lender holdup and alleviates financial constraints for private firms. Received May 25, 2017; editorial decision August 8, 2018 by Editor David Denis.