Quo Vadis, earnings management? Analysis of manipulation determinants in Central European environment

• Authors: Katarina Valaskova , Peter Adamko , Katarina Frajtova Michalikova , Jaroslav Macek

Abstracts

EN

Research background: The paper investigates the earnings management phenomenon in the context of Central European countries, attempting to identify the factors and incentives that can influence earnings management behavior on a sample of 8,156 enterprises from Slovakia, the Czech Republic, Hungary, and Poland. Purpose of the article: The main purpose of the manuscript is to prove that there are significant differences in earnings management practices (measured by discretionary accruals) across the countries and to find the firm-specific features that influence the way enterprises manage their earnings. Methods: The modified Jones model was used to calculate the discretionary accruals, which are further analyzed across the countries. The statistically significant differences were confirmed across the countries. Thus, the impact of the economic sector, firm size, firm age, legal form, and ownership structure on earnings management behavior is studied by the Kruskal-Wallis test. The Dunn-Bonferroni post hoc tests then revealed the significant differences across the categories of the investigated earnings management determinants. To find the association between the particular earnings management practice (income-increasing or income-decreasing manipulation), correspondence analysis was used to visualize the mutual relations. Findings & value added: The results of the realized investigation revealed that the economic sector is one of the most important earnings management determinants, as its statistical significance was confirmed in each analyzed country. The correspondence analysis determined specific sectors, where income-increasing manipulation with earnings is practiced (NACE codes F, J, K, M, N), and vice versa, income-decreasing earnings management is characteristic for enterprises in sectors A, C, D, G or L. In specific economic conditions, firm size is also a relevant indicator (Hungary), or firm age and legal form and ownership structure (Poland). The recognition of crucial earnings management incentives may be helpful for authorities, policymakers, analysts and auditors when identifying various techniques and practices of earnings manipulation which could vary across the sectors and taking necessary measures to mitigate potential financial risks.

Keywords

EN

earnings management; discretionary accruals; aggressive accounting; conservative accounting

• Publisher: Instytut Badań Gospodarczych
• Journal: Oeconomia Copernicana
• Year: 2021
• Volume: 12
• Issue: 3
• Pages: 631-669

Dates

published

2021

Contributors

author

Katarina Valaskova

• University of Zilina

• https://orcid.org/0000000342237519

author

Peter Adamko

• University of Zilina

• https://orcid.org/0000000162564475

author

Katarina Frajtova Michalikova

• University of Zilina

• https://orcid.org/0000000245506561

author

Jaroslav Macek

• University of Zilina

• https://orcid.org/0000000218286321

References

• Ajina, A., Laouiti, M., & Msolli, B. (2016). Guiding through the fog: does annual report readability reveal earnings management? Research in International Business and Finance, 38, 509?516. doi: 10.12691/jfa-6-1-2.
• Alhadab, M., & Al-Own, B. (2019). Earnings management and equity incentives: evidence from the European banking industry. International Journal of Accounting and Information Management, 27(2), 244?261. doi: 10.1108/IJAI M-08-2017-0094.
• Amara, I. (2017). The effect of discretionary accruals on financial statement fraud: the case of the French companies. International Research Journal of Finance and Economics, 161, 48?62.
• Amidu, M., & Issahaku, H. (2019). Do globalisation and adoption of IFRS by banks in Africa lead to less earnings management? Journal of Financial Reporting and Accounting, 17(2), 222?248. doi: 10.1108/JFRA-05-2017-0035.
• Bin, L., Chen, D. H., & Hasanatunnisa, S. (2018). The earnings-return association of family and non-family Indonesian firms: an empirical study. Economics, Management, and Financial Markets, 13(2), 56?69. doi: 10.22381/EMFM132 20184.
• Benzécri, J. P. (1973). L'Analyse des Données. Volume II. L'Analyse des Correspondances. Paris: Dunod.
• Cai, Y., Kim, Y., Li, S. Q., & Pan, C. (2019). Tone at the top: CEOs´ religious beliefs and earnings management. Journal of Banking & Finance, 106, 195?213. doi: 10.1016/j.jbankfin.2019.06.002.
• Capalbo, F., Frino, A., Lim, M. Y., Mollica, V., & Palumbo, R. (2018). The impact of CEO narcissism on earnings management. Abacus ? A Journal of Accounting Finance and Business Studies, 54(2), 210?226. doi: 10.1111/abac .12116.
• Cappellesso, G., & Rodrigues, J. M. (2019). Book-tax differences as an indicator of earnings management and tax avoidance: an analysis in the G-20 countries. Contabilidade Gestao e Governanca, 22(3), 352?366. doi: 10.21714/1984-39 252019v22n3a3.
• Carp, M., & Georgescu, I. E. (2015). Study on the factors that influence the degree of management of the financial earnings reported by BSE-quoted companies. In K. S. Soliman (Ed.). Innovation vision 2020: from regional development sustainability to global economic growth. Norristown: Int. Business Information Management Association, 2146?2158.
• Cassell, C., Myers, J., Myers, L. & Seidel, T. (2014). Does auditor tenure impact the effectiveness of auditors? response to fraud risk? Retrieved from 10.2139/SSRN.2448680 (15.07.2021).
• Chen, C. L., Huang, A. G., & Jha, R. (2012). Idiosyncratic return volatility and the information quality underlying managerial decision. Journal of Financial and Quantitative Analysis, 47(4), 873?899. doi: 10.1017/S002210901200018X
• Chen, C. C. S., Chou, Y. Y., & Wei, P. (2020). Country factors in earnings management of ADR firms. Finance Research Letters, 32, 101146. doi: 10.1016/j.fr l.2019.04.003.
• Chen, S. H., Cai, W. Y., & Jebran, K. (2021). Does social trust mitigate earnings management? Evidence from China. Emerging Markets Finance and Trade, 57(10), 2995?3016. doi: 10.1080/1540496X.2019.1675046.
• Cieslik, R. (2016). ?Earnings management? as a factor for underpricing initial public offerings: evidence from the Warsaw Stock Exchange. Problemy Zarzadzania-Management Issues, 14(4), 103?112. doi: 10.7172/1644-9584.6 3.7.
• Cohen, S., Bisogno, M., & Malkogiani, I. (2019). Earnings management in local governments: the role of political factors. Journal of Applied Accounting Research, 20(3), 331?348. doi: 10.1108/JAAR-10-2018-0162.
• Cudia, C. P., Dela Cruz, A. L., & Estabillo, M. B. (2021). Effect of firm characteristics and corporate governance practices in earnings management: evidence from publicly listed property sector firm in the Philippines. Vision-The Journal of Business Perspective, 25(1), 77?87. doi: 10.1177/0972262920953428.
• Das, R. C., Mishra, C. S., & Rajib, P. (2018). Firm-specific parameters and earnings management: a study in the Indian context. Global Business Review, 19(5), 1240?1260. doi: 10.1177/0972150918788748.
• Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting Review, 70(2), 193?225.
• Durana, P., Zauskova, A., Vagner, L., & Zadnanova, S. (2020). Earnings drivers of Slovak manufacturers: efficiency assessment of innovation management. Applied Sciences, 10(12), 4251. doi: 10.3390/app10124251.
• Elias, R. Z. (2002). Determinant of earnings management ethics among accountants. Journal of Business Ethics, 40(1), 33?45. doi: 10.1023/A:1019956821253.
• El Diri, M., Lambrinoudakis, C., & Alhadab, M. (2020). Corporate governance and earnings management in concentrated markets. Journal of Business Research, 108, 291?306. doi: 10.1016/j.jbusres.2019.11.013.
• Enomoto, M., Kimura, F., & Yamaguchi, T. (2018). A cross-country study on the relationship between financial development and earnings management. Journal of International Financial Management Accounting, 29(2), 166?194. doi: 10.11 11/jifm.12078.
• Feng, M., Gramlich, J. D., & Gupta, A. (2009). Special purpose vehicles: empirical evidence on determinants and earnings management. Accounting Review, 84(6), 1833?1876. doi: 10.2308/accr.2009.84.6.1833.
• Garcia-Sanchez, I. M., Hussain, N., Khan, S. A., & Martinez-Ferrero, J. (2020). Managerial entrenchment, corporate social responsibility, and earnings management. Corporate Social Responsibility and Environmental Management, 27(4), 1818?1833. doi: 10.1002/csr.1928.
• Gonzalez, J. S., & Garcia-Meca, E. (2014). Does corporate governance influence earnings management in Latin American markets? Journal of Business Ethics, 121(3), 419?440. doi: 10.1007/s10551-013-1700-8.
• Gregova, E., Smrcka, L., Michalkova, L., & Svabova, L. (2021). Impact of tax benefits and earnings management of capital structures across V4 countries. Acta Polytechnica Hungarica, 18(3), 221?244. doi: 10.12700/APH.18.3.2021.3 .12.
• Greenacre, M. (2007). Correspondence analysis in practice. London: Chapman & Hall.
• Grimaldi, F., Caragnano, A., Zito, M., & Mariani, M. (2020). Sustainability engagement and earnings management: the Italian context. Sustainability, 12(12), 4881. doi: 10.3390/su12124881.
• Grofcikova, J. (2020). Impact of selected determinants of corporate governance on financial performance of companies. Ekonomicko-manazerske spektrum, 14(2), 12?23. doi: 10.26552/ems.2020.2.12-23.
• Guan, Y. Y, Lobo, G. J., Tsang, A., & Xin, X. G. (2020). Societal trust and management earnings forecasts. Accounting Review, 95(5), 149?184. doi: 10.2308/t ar-2017-0023.
• Hamza, S. E, & Kortas, N. (2019). The interaction between accounting and real earnings management using simultaneous equation model with panel data. Review of Quantitative Finance and Accounting, 53(4), 1195?1227. doi: 10.100 7/s11156-018-0779-5.
• Hoang, K. M. T., & Phung, T. A. (2019). The effect of financial leverage on real and accrual-based earnings management in Vietnamese firms. Economics & Sociology, 12(4), 299?312. doi: 10.14254/2071-789X.2019/12-4/18.
• Hirschfeld, H. O. (1935). A connection between correlation and contingency. Proc. Cambridge Philosophical Society, 31, 520?524.
• Holcik, J., & Komend, M. (2015). Mathematical biology: e-learning textbook. Brno: Masaryk University.
• Hooghiemstra, R., Hermes, N., Oxelheim, L., & Randoy, T. (2019). Strangers on the board: the impact of board internationalization on earnings management of Nordic firms. International Business Review, 28(1), 119?134. doi: 10.1016/j.ib usrev.2018.08.007.
• Hussain, H. I., Kot, S., Kamarudin, F., & Mun, W.C. (2020). The nexus of competition freedom and the efficiency of microfinance institutions. Journal of Competitiveness, 12(2), 67?89. doi: 10.7441/joc.2020.02.05.
• Ibrani, E. Y., Faisal, F., & Handayani, Y. D. (2019). Determinant of non-GAAP earning management practices and its impact on firm value. Cogent Business & Management, 6(1). 1666642. doi: 10.1080/23311975.2019.1666642.
• Jackson, A. B. (2017). Discretionary accruals: Earnings management?or not? Abacus, 54(2), 136?153. doi: 10.1111/abac.12117.
• Kim, H. W., & Lee, S. (2016). Does revenue-expense matching relate to going-concern audit opinion conditional on firm?s financial distress? Journal of Applied Business Research, 32(3), 947?966. doi: 10.19030/jabr.v32i3.9665.
• Kliestik, T., Belas, J., Valaskova, K., Nica, E., & Durana, P. (2021). Earnings management in V4 countries: the evidence of earnings smoothing and inflating. Economic Research-Ekonomska Istrazivanja, 34(1), 1452?1470. doi: 10.1080/1 331677X.2020.1831944.
• Kral, P., Kanderova, M., Kascakova, A., Nedelova, G., & Valencakova, V. (2009). Multidimensional statistic methods focused on problem solving in economic practice. Banska Bystrica: Matej Bel University.
• Lanier, D., Wempe, W. F., & Swink, M. (2019). Supply chain power and real earnings management: Stock market perceptions, financial performance effects, and implications for suppliers. Journal of Supply Chain Management, 55(1), 48?70. doi: 10.1111/jscm.12186.
• Lee, B. B., & Vetter, W. (2015). Critical evaluation of accrual models in earnings management studies. Journal of Accounting and Finance, 15(1), 62?71.
• Lemma, T. T., Negash, M., Mlilo, M., & Lulseged, A. (2018). Institutional ownership, product market competition, and earnings management: some evidence from international data. Journal of Business Research, 90, 151?163. doi: 10.10 16/j.jbusres.2018.04.035.
• Lennox, C., Lisowsky, P., & Pittman, J. (2013). Tax aggressiveness and accounting fraud. Journal of Accounting Research, 51(4), 739?778. doi: 10.1111/joar.12 002.
• Li, S. F. (2010). Determinants of management's preferences for an earnings threshold. Review of Accounting and Finance, 9(1), 33?49. doi: 10.1108/14757 701011019808.
• Li, V. (2019). The effect of real earnings management on the persistence and informativeness of earnings. British Accounting Review, 51(4), 402?423. doi: 10.1016/j.bar.2019.02.005.
• Li, Y. H., Li, X., & Djajadikerta, H. G. (2020). Financial distress, internal control, and earnings management: evidence from China. Journal of Contemporary Accounting & Economics, 16(3), 100210. doi: 10.1016/j.jcae.2020.100210.
• Lisic, L., Silveri, S., Song, Y., & Wang, K. (2015). Accounting fraud, auditing, and the role of government sanctions in China. Journal of Business Research, 68(6), 1186?1195.
• Lopez, D. M., & Vega, J. (2019). Evaluating the effect of industry specialist duration on earnings management. Advances in Accounting, 45, 100412. doi: 10.101 6/j.adiac.2019.02.002.
• Maglio, R., Rey, A., Agliata, F., & Lombardi, R. (2020). Connecting earnings management and corporate social responsibility: a renewed perspective. Corporate Social Responsibility and Environmental Management, 27(2), 1108?1116. doi: 10.1002/csr.1868.
• Martinez-Martinez, D., Andrades, J., Larran, M., Muriel, M. J., & Sancho, M. P. L. (2021). Determinants of earnings management in Spanish SMEs and its relationship with CSR: the relevance of sector life cycle stage. Journal of Small Business and Enterprise Development, 28(3), 399?428. doi: 10.1108/JSBED-07-2020-0257.
• Meek, G. K., Rao, R. P., & Skousen, C. J. (2007). Evidence on factors affecting the relationship between CEO stock option compensation and earnings management. Review of Accounting and Finance, 6(3), 304. doi: 10.1108/1475770071 0778036.
• Mongrut, S., & Winkelried, D. (2019). Unintended effects of IFRS adoption on earnings management: the case of Latin America. Emerging Markets Review, 38, 377?388. doi: 10.1016/j.ememar.2018.11.004.
• Montenegro, T. M., & Rodrigues, L. L. (2020). Determinants of the attitudes of Portuguese accounting students and professionals towards earnings management. Journal of Academic Ethics, 18(3), 301?332. doi: 10.1007/s10805-020-09376-z.
• Ngo, D. N. P., & Le, A. T. H. (2021). Relationship between the audit committee and earning management in listed companies in Vietnam. Journal of Asian Finance Economics and Business, 8(2), 135?142. doi: 10.13106/jafeb.2021.vol 8.no2.0135.
• Nguyen, A. H., & Duong, C. T. (2020). Provincial governance quality and earnings management: empirical evidence from Vietnam. Journal of Asian Finance Economics and Business, 7(2), 43?52. doi: 10.13106/jafeb.2020.vol7.no2.43.
• Palacios-Manzano, M., Gras-Gil, E., & Santos-Jean, J. M. (2021). Corporate social responsibility and its effect on earnings management: an empirical research on Spanish firms. Total Quality Management & Business Excellence, 32(7-8), 921?937. doi: 10.1080/14783363.2019.1652586.
• Papik, M., & Papikova, L. (2021). Application of selected data mining techniques in unintentional accounting error detection. Equilibrium. Quarterly Journal of Economics and Economic Policy, 16(1), 185?201. doi: 10.24136/eq.2021.007.
• Perols, J., & Lougee, B. A. (2011). The relation between earnings management and financial statement fraud. Advances in Accounting, 27(1), 39?53. doi: 10.1016/ j.adiac.2010.10.004.
• Poradova, M., & Siekelova, A. (2020). Analysis of factors with impact on earnings and their management in commercial companies. In P. Jedlicka, P. Maresova, K. Firlej, I. Soukal (Eds.). International scientific conference on Hradec economic days. Hradec Kralove: University of Hradec Kralove, 649?659.
• Postula, M., & Raczkowski, K. (2020). The impact of public finance management on sustainable development and competitiveness in EU Member States. Journal of Competitiveness, 12(1), 125?144. doi: 10.7441/joc.2020.01.08.
• Premti, A., & Smith, G. (2020). Earnings management in the pre-IPO process: Biases and predictors. Research in International Business and Finance, 52, 101120. doi: 10.1016/j.ribaf.2019.101120.
• Rowland, Z., Kasych, A., & Suler, P. (2021). Prediction of financial distress: case of mining enterprises in Czech Republic. Ekonomicko-manazerske spektrum, 15(1), 1?14. doi: 10.26552/ems.2021.1.1-14.
• Salehi, M., & Dashtbayaz, M. L. (2020). The mediating effect of audit quality on the relationship between earnings and earnings valuation in Iran. Ekonomski Vjesnik, 33(1), 25?38.
• Saona, P., & Muro, L. (2018). Firm- and country- level attributes as determinants of earnings management: an analysis for Latin American firms. Emerging Markets Finance and Trade, 54(12), 2736?2764. doi: 10.1080/1540496X.2017 .1410127.
• Saona, P., Muro, L., San Martin, P., & Baier-Fuentes, H. (2019). Board of director's gender diversity and its impact on earnings management: an empirical analysis for select European countries. Technological and Economic Development of Economy, 25(4), 634?663. doi: 10.3846/tede.2019.9381.
• Siekelova, A. (2021). Historical development of earnings management models. SHS Web of Conferences, 92, 02058. doi: 10.1051/shsconf/20219202058.
• Siekelova, A., Androniceanu, A., Durana, P., & Michalikova, K. F. (2021). Earnings management (EM), initiatives and company size: An empirical study. Acta Polytechnica Hungarica, 17(9), 41?56. doi: 10.12700/APH.17.9.2020.9.3.
• Sosnowski, T. (2017). Earnings management and the floatation structure: empirical evidence from Polish IPOs. Equilibrium. Quarterly Journal of Economics and Economic Policy, 12(4), 693?709. doi: 10.24136/eq.v12i4.36.
• Sosnowski, T. (2018). Earnings management in the private equity divestment process on Warsaw Stock Exchange. Equilibrium-Quarterly Journal of Economics and Economic Policy, 13(4), 689?705. doi: 10.24136/eq.2018.033.
• Souza, J. A. S, Costa, W. B., Almeida, J. E. F., & Bortolon, P. M. (2013). Determinants and consequences of delisting in earnings management. Revista Evidenciacao Contabil & Financas, 1(1), 38?57. doi: 10.18405/recfin20130 103.
• Sun, W. S., & Sun, J. (2008). Analysis on factors influencing managers' earnings management intentions. In H. Zhang & R. Zhao (Eds.). Logistic research and practice in China. Marrickville: Orient Academic Forum.
• Supardi, S., & Asmara, E. N. (2018). Financial factors, corporate governance and earnings management: evidence from Indonesian manufacturing industry. In A. G. Abdullah, M. Arief, C. Furqon, V. Gaffar, H. Mulyani, Y.S etiawan, & A. Sofia (Eds.). Proceedings of the 1st international conference on economics, business, entrepreneurship, and finance. Paris: Atlantis Press, 727?736.
• Susanto, Y. K., Pirzada, K., & Adrianne, S. (2019). Is tax aggressiveness an indicator of earnings management? Polish Journal of Management Studies, 20(2), 516?527. doi: 10.17512/pjms.2019.20.2.43.
• Thanh, S. D., Canh, N. P. M. & Ha, N. T. T. (2020). Debt structure and earnings management: a non-linear analysis from an emerginf economy. Finance Research Letters, 35, 101283. doi: 10.1016/j.frl.2019.08.031.
• Trompeter, G. M., Carpenter, T. D., Desai, N., Jones, K. L., & Riley, R. A. (2013). A synthesis of fraud-related research. Auditing: A Journal of Practice & Theory, 32(1), 287?321. doi: 10.2308/ajpt-50360.
• Wasan, P., & Mulchandani, K. (2020). Corporate governance factors as predictors of earnings management. Journal of General Management, 45(2), 71?92. doi: 10.1177/0306307019872304.
• Waweru, N. M., & Prot, N. P. (2018). Corporate governance compliance and accrual earnings management in eastern Africa: evidence from Kenya and Tanzania. Managerial Auditing Journal, 33(2), 171?191. doi: 10.1108/MAJ-09-2016-1438.
• Wijayana, S., & Gray, S. J. (2019). Institutional factors and earnings management in the Asia-Pacific: is IFRS adoption making a difference? Management International Review, 59(2), 307?344. doi: 10.1007/s11575-018-0371-1.
• Xiao, X., & Liu, Y. (2010). Analysis of audit opinion affecting factors-from the perspective of earnings management. In K. L. Zhu, H. Zhang (Eds.). Statistic application in scientific and social reformation. Marrickville: Aussino Academinc Publishing House, 569?574.
• Yasser, Q. R., Al Mamun, A., & Rodrigs, M. (2017). Director training and financial disclosure: Asian insights. Contemporary Economics, 11(2), 145?159. doi: 10.5709/ce.1897-9254.233.
• Zyznarska-Dworczak, B., & Mamić Sačer, I. (2019). Accounting systems in Poland and Croatia ? comparative study. Zagreb International Review of Economics and Business, 22(1), 55?72. doi: 10.2478/zireb-2019-0012.

Identifiers

DOI

10.24136/oc.2021.021

Biblioteka Nauki

19233715