This paper analyzes how earnings management reflects the manager’s private information and how investors respond to the reported(managed) earnings. We analyze two situations: one is that earning management is unrestricted and the other is that isn’t. In the first situation, the agent tends to report extreme earnings regardless of his private information where his utility is maximized. In the second situation, i.e., where the earnings management is strictly tied to(a linear combination of) the manager’s two private signals which they are unmanaged earnings and additional private information about the firm’s future prospects, the reported earnings is related to private information. Risk-averse shareholders collectively design a compensation contract and individually trade in the stock market. In equilibrium the reported earnings fully convey the manager’s private information and an imperfect, separate observation of earnings management is not used in the optimal linear contract. When the unconditional expectation of earnings management is constrained to be zero, rational investors behave as if they were functionally fixated to the earnings number.