Does Financial Crisis impact Earnings Management Evidence from Portuguese and UK

Inês Lisboa, Aleksandre Kacharava

Abstract


Purpose: The main aim of this work is to analyse if 2008 financial crisis had impact on earnings management. We compare two countries with different legal forces in terms of quality of accounting to see the differences in firm’s involvement in earnings management. Finally we analyse which determinants impact management of results.

Design/methodology/approach: This study focus on Portuguese and UK listed firms from a large period, 2004 till 2014. We first use the Kothari, Leone & Wasley model (2005) to calculate the discretionary accruals, a proxy of earnings management. Then we analyse the impact of six determinants on earnings management.

Findings: Findings suggest that financial crisis had impact on firms’ tendency to manage financial results. Country effect is not statistically significant, even if the Portuguese and UK firms’ propensity to manage earnings is singular. Finally, firm’s size and indebt are two relevant characteristics to explain earnings management.

Originality/values: This research as three major contributions. First, we not only analyse if the firms in the sample manipulate results, but we also study the impact of some characteristics on earnings management, contributing to the enrichment of the literature. Moreover, we focus on two main effects: crisis and country effect. Studies analysing both effects in simultaneous are scarce. Finally, we also believe that results are relevant to both financial investors and regulators as they may understand which factors impact manipulation of results, and can take actions that may reduce the possibility of practicing earnings management.

 

Keywords:  earnings management, financial crisis, accruals, Portugal, UK


Full Text:

PDF

References


Ahmed, K., Godfrey, J., & Saleh, N. (2008). Market perceptions of discretionary accruals by debt renegotiating during economic downturn. The International Journal of Accounting, 43, 114–138.

Ahmad-Zaluki, N., Campbell, K., & Goodacre, A. (2011). Earnings management in Malaysian IPOs: The East Asian crisis, ownership control, and post-IPO performance. The International Journal of Accounting, 46, 111–137.

Alves, S. (2012). Ownership Structure and Earnings Management: Evidence from Portugal. Australasian Accounting, Business and Finance Journal, 6(1), 57-74.

Bartram, S., & Bodnar, G. (2009). No place to hide: the global crisis in equity markets in 2008/2009. Journal of International Money and Finance, 28, 1246-1292.

Bruns, W., & Merchant, K. (1990). The dangerous morality of managing earnings. Management Accounting, 72, 22–25.

Cascino, S., Puguliese, A., Mussolino, D., & Sansone, C. (2010). The influence of family ownership on the quality of accounting information. Family Business Review, 23(3), 246-265.

Cimini, R. (2015). How has the financial crisis affected earnings management? A European study, Applied Economics, 47, 302-317.

Charitou, A., Lambertides, N., & Trigeorgis, L. (2007). Earnings behaviour of financially distressed firms: The role of institutional ownership. Abacus, 43, 271–296

Chen, G., Firth, M., Gao, D., & Rui, O. (2006). Ownership structure, corporate governance, and fraud: evidence from China. Journal of Corporate Finance, 12, 424–448.

Costa, L., Cerqueira, A., & Brandão, E. (2016). The impact of financial crisis on earnings management: evidence from EU-25, FEP working paper n.578.

DeAngelo, L. (1986). Accounting numbers as market valuation substitutes: A study of management buyouts of public stockholders. The Accounting Review, 61(3), 400-420.

Dechow, P., Sloan, R., & Sweeney, A. (1995). Detecting earnings management. The Accounting Review, 70(2), 193-225.

DeFond, M., & Park, C. (1997). Smoothing income in anticipation of future earnings, Journal of Accounting and Economics, 23, 115-139.

Degeorge, F. (1999). Earnings management to exceed thresholds. The Journal of Business, 72, 1-33.

Dimitras, A., Kyriakou, M., & Iatridis, G. (2015). Financial crisis, GDP variation and earnings management in Europe. Research in International Business and Finance, 34, 338-354.

Dye, R. (1988). Earnings management in an overlapping generations model. Journal of Accounting Research, 26, 195–235.

Filip, A., & Raffournier, B. (2014). Financial Crisis And Earnings Management: The European Evidence. The International Journal of Accounting, 49, 455–478.

Goel, M., & Thakor, A. (2003). Why do firms smooth earnings? Journal of Business, 76(1), 151–193.

Goel, S. (2016). Earnings Management Motivation: Accrual Accounting vs. Cash Accounting, Australasian Accounting, Business and Finance Journal, 10(3), 48-66.

Gorgan, C., Gorgan, V., Dumitru, V., & Pitulice, C. (2012). The Evolution of the Accounting Practices during the Recent Economic Crisis: Empirical Survey Regarding the Earnings Management, Amfiteatru Economic XIV, 32, 550-562.

Ghosh, D., & Olsen, L. (2008). Environmental uncertainty and managers' use of discretionary accruals. Accounting, Organizations and Society, 34(2), 188–205.

Graham, J., Harvey, C., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40, 3–73.

Habib, A., Hossain, M., & Jiang, H. (2011). Environmental uncertainty and the market pricing of earnings smoothness. Advances in Accounting, incorporating Advances in International Accounting, 27, 256–265.

Healy, P. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7, 85–107.

Healy, P., & Wahlen, J. (1999). A Review of the Earnings Management Literature and its Implications for Standard Setting. Accounting Horizons, 13(4), 365-383.

Hu, N., Cao, Q., and Zheng, L. (2015). Listed Companies’ Income Tax Planning and Earnings Management: Based on China’s Capital Market. Journal of Industrial Engineering and Management, 8(2), 417-434.

Iatridis, G., & Dimitras, A. (2013). Financial crisis and accounting quality: evidence from five European countries. Advances in Accounting, 29(1), 154–160.

Jensen, M. (1976). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. American Economic Review, 76(2), 323-329.

Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency and ownership structure. Journal of Financial Economics, 4, 305-360.

Jiraporn, P., & DeDalt, P. (2009). Does founding family control affect earnings management? Applied Economics Letters, 16(2), 113-119.

Jones, J. (1991).Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193-228.

Kousenidis, D., Ladas, A., & Negakis, C., (2013). The effects of the European debt crisis on earnings quality, International Review of Financial Analysis, 30, 351-362.

Kothari, S., Leone, A., & Wasley, C. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163-197.

Lambert, R. (1984). Income smoothing as rational equilibrium behavior. Accounting Review, 59(4), 604–618.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and Finance. Journal of Political Economy, 106(6), 1113-1155.

Leuz, C., Nanda, D., & Wysocki, P. (2003). Earnings management and investor protection: an international comparison, Journal of Financial Economics, 69(3), 505-527.

Lisboa, I. (2016). Impact of financial crisis and family control on earning management of Portuguese listed firms. European Journal of Family Business, 6(2), 118-131.

Moreira, J., & Pope, P. (2007). Earnings Management to Avoid Losses: a cost of debt explanation. Research Center on Industrial, Labour and Managerial Economics, DP 2007-04.

Peasnell, K., Pope, P., &Young, S. (2000). Detecting earnings management using cross-sectional abnormal accruals models. Accounting & Business Research, 30(4), 313-326.

Pereira, A., & Alves, M. (2017). Earnings management and European Regulation 1606/2002: Evidence from non-financial Portuguese companies listed in Euronext, Revista de Contabilidad – Spanish Accounting Review, 20(2), 107–117.

Persakis, A., & Iatridis, G. (2015). Earnings quality under financial crisis: A global empirical investigation. Journal of Multinational Financial Management, 30, 1-35.

Persakis, A., and Iatridis, G. (2016). Audit quality, investor protection and earnings management during the financial crisis of 2008: An international perspective. Journal of International Financial Markets, Institutions & Money, 41, 73-101.

Rodríguez-Pérez, G., & Hemmen, S. (2010). Debt, diversification and earnings management. Journal of Accounting and Public Policy, 29(2), 138–159.

Roychowdhury S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42, 335-370.

Saar, G. (2002). Investor uncertainty and order flow information. Working Paper Series New York University, NY: Salamon Center S-02-31.

Sloan, R. (1996). Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings? The Accounting Review, 71, 289-315.

Seybert, N. (2010). R&D Capitalization and Reputation-Driven Real Earnings Management. The Accounting Review, 85, 671–693.

Walker, M. (2013). How far can we trust earnings numbers? What research tells us about earnings management. Accounting & Business Research, 43(4), 445-481.

Wang, Z., & Williams T. (1994). Accounting income smoothing and stockholder wealth. Journal of Applied Business Research, 10(3), 96–104.

Wang, Y., Butterfield, C., & Campbell, M. (2016). Deferred Tax Items as Earnings Management Indicators, International Management Review, 12(2), 37-42.

Watts, R., & Zimmerman, J. (1986), Positive accounting theory. New Jersey: Prentice-Hall Inc. http://ssrn.com/abstract=928677.

Xu, G., & Ji, X. (2016). Earnings management by top Chinese listed firms in response to the global financial crisis. International Journal of Accounting and Information Management, 24(3), 226-251.




ISSN 2183-5594

Indexing: GOOGLE SCHOLAR - LATINDEX - DRJI