Earnings management in small profit firms during financial crisis of 2008–2009
1University of Oulu, Oulu Business School, Department of Accounting, Accounting
|Online Access:||PDF Full Text (PDF, 1.5 MB)|
|Persistent link:|| http://urn.fi/URN:NBN:fi:oulu-201304051161
|Publish Date:|| 2013-04-08
|Thesis type:||Master's thesis
Purpose: This paper examines empirically the managerial earnings management practices undertaken by small profits firms, and seeks whether these practices changed during the recent global financial crisis. Previous studies on small but positive earnings are normally in whether earnings management causes the discontinuity around zero in earnings distribution. There few studies combined discontinuity around zero with different macroeconomic conditions.
Design: The association between earnings management and small profit firms is investigated by three measures. First, earnings distribution of scaled earnings by lagged market value in different scaled earnings level during financial crisis is portrayed. Second, distribution of accumulated discretionary accruals which is the proxy for earnings management in different scaled earnings level is exhibited. Third, based on the qualified firm-year observations, discretionary accruals regressed on several earnings management controlling variables are tested. Due to the limited number of qualified firm-year observations, two measures of small profit firms are used.
Data: The sample is selected from all listed firms in United States. Financial crisis period is confined in Year 2008 and 2009 when the stock price was in the bottom in recent decades. In these two years, the incentives from capital markets are restricted in the low level.
Findings: Without considering financial crisis, there is income-increasing earnings management in small profit firms which is consistent with previous studies. After considering financial crisis, the practices of earnings management is changed to income-decreasing, which provides the direct evidence on that the constitution of small profits firms are those ex-ante profit firms during the crisis and also provides the indirect evidence on that the constitution of small profits firms are small losses or losses firms in other periods. Both earnings distribution and accumulated discretionary accruals in financial crisis have the same consequence.
Practical Implications: This paper shows profit firms employ income-decreasing earnings management during the bad economic situation. The good financial performance from these firms in the post-crisis period need to be questioned whether the business actually revived.
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