EM during financial crises
| Research product | EM behaviour | Motivations |
|---|---|---|
| Bornemann et al. (2012) | EM increased | To present a stable income stream |
| Graham et al. (2005) | To build credibility with the capital market; maintain or increase stock price; improve the external reputation of the management team; convey future growth prospect | |
| Habib et al. (2013) | Compared to healthy firms, managers of distressed firms employ an income-decreasing EM technique. This finding is consistent with DeAngelo et al. (1994) who found that managers engage in downward EM via negative abnormal accruals and discretionary write-offs, rather than attempt to inflate reported income | |
| Iatridis and Dimitras (2013) | Low-profitability companies increased opportunistic behaviours during crises to achieve certain goals (such as “big bath”) | |
| Saleh and Ahmed (2005) | Financially distressed firms’ seeking debt restructuring are more likely to adopt income-reducing accruals than those firms that have not undertaken debt restructuring. Such large abnormal accruals may be related to the sample firms’ ongoing difficulties. It is also possible that the magnitude of negative discretionary accruals have been accentuated due to the reversal of some past income-increasing discretionary accruals in the two and three years before debt defaults | |
| Cimini (2015) | EM decreased | (1) Increase of conditional conservatism during the financial crisis; (2) Close monitoring activity of the auditor |
| Filip and Raffournier (2014) | (1) A possibility that managers have less incentive to manipulate earnings in crisis periods due to a higher market tolerance for poor performance; (2) litigation risk increases during crises, which should dissuade insiders from engaging in EM; (3) the change in the behavior of companies may also respond to a higher demand for more timely earnings during troubled periods | |
| Ma and Song (2016) | Results consistent with diminished EM in a recession period as suggested, by among others, by Strobl (2013) | |
| Strobl (2013), Campa (2019) | The relationship between EM and crisis depends on multiple aspects; under high levels of indebtedness, there is a more extensive use of income-increasing EM behaviours among listed firms when compared to unlisted ones | The manager’s incentive to overstate a firm’s earnings is inversely related to the correlation between that firm’s earnings and the market: Managers of firms whose earnings more strongly correlate with the market during periods of economic expansion are more inclined to engage in manipulation during periods of recession, and vice versa |
| Research product | EM behaviour | Motivations |
|---|---|---|
| EM increased | To present a stable income stream | |
| To build credibility with the capital market; maintain or increase stock price; improve the external reputation of the management team; convey future growth prospect | ||
| Compared to healthy firms, managers of distressed firms employ an income-decreasing EM technique. This finding is consistent with | ||
| Low-profitability companies increased opportunistic behaviours during crises to achieve certain goals (such as “big bath”) | ||
| Financially distressed firms’ seeking debt restructuring are more likely to adopt income-reducing accruals than those firms that have not undertaken debt restructuring. Such large abnormal accruals may be related to the sample firms’ ongoing difficulties. It is also possible that the magnitude of negative discretionary accruals have been accentuated due to the reversal of some past income-increasing discretionary accruals in the two and three years before debt defaults | ||
| EM decreased | (1) Increase of conditional conservatism during the financial crisis; (2) Close monitoring activity of the auditor | |
| (1) A possibility that managers have less incentive to manipulate earnings in crisis periods due to a higher market tolerance for poor performance; (2) litigation risk increases during crises, which should dissuade insiders from engaging in EM; (3) the change in the behavior of companies may also respond to a higher demand for more timely earnings during troubled periods | ||
| Results consistent with diminished EM in a recession period as suggested, by among others, by | ||
| The relationship between EM and crisis depends on multiple aspects; under high levels of indebtedness, there is a more extensive use of income-increasing EM behaviours among listed firms when compared to unlisted ones | The manager’s incentive to overstate a firm’s earnings is inversely related to the correlation between that firm’s earnings and the market: Managers of firms whose earnings more strongly correlate with the market during periods of economic expansion are more inclined to engage in manipulation during periods of recession, and vice versa |
Note(s): The table summarizes the findings for the effect on EM produced by the financial crisis
Source(s): Table by authors