AbstractThis study is an attempt to examine the impact of earnings management on profitability of companies. Earnings management has emerged as a vital issue in the recent past for companies, investors, analysts and capital markets for manipulating profitability. The study was conducted on companies listed on the Karachi Stock Exchange. The sample included 98 companies spanning different industries and took five-year financial data from the annual reports of the selected companies from 2002 to 2006. The modified Jones model was applied to calculate discretionary accruals which were violently used to manage earnings and used as a proxy for earnings management in literature. Cross-sectional time series regression was used to empirically verify the study results. The results showed that earnings management has a negative impact on companies' profitability. This paper examines the impact of earnings management activities on companies' profitability. Earnings management has become a very important issue for companies, investors, analysts and the capital market in general. Investors value companies based on earnings, which indicate the amount of value added by a company and provide crucial information in company performance evaluations and comparisons because they reflect concrete figures provided by companies according to reasonable standards. Increasing profits indicates an increase in value, conversely, decreasing profits indicates a decrease in value. Management remains vigilant about earnings disclosure, earnings growth and minimizing uncertainty and manages reporting accordingly. Managers Use Accounting Judgment and Transactions to Manipulate Expectations...... middle of paper ......f Private Firms: Insights into Smoothing, Agency Costs, and Information Asymmetry. Spohr, J. (2002). The quality of accounting and earnings: The role of accrual estimation errors. Swedish School of Economics and Business Administration, Accounting Department. vol. 7, page. 3-19.Sudipto Bhattacharya (1979). Imperfect information, dividend policy, and the "bird in the hand" fallacy. The Bell Journal of Economics, 10: 259-270. Sumit Agarwal, Souphala Chomsisengphet, Chunlin Liu, and S. Ghon Rhee (December 2003). Earnings management during distinct periods of capital demand: Evidence from Japanese banks. Working Papers of Ofheo Yan Zhang (May 2004). Do speculative short sellers take over earnings management? Yuan Ding, Hua Zhang, Junxi Zhang (July 6, 2004). Ownership concentration and earnings management: Comparison of Chinese private and state-owned listed companies.