Financial crisis and accrual and real earnings management in Europe

Abstract

The purpose of this study is to investigate whether firms engage more intensively in earnings management in a period of financial crisis. In particular, we examined a sample of 10.139 observations from 19 European Union countries for the period 2005-2014. Earnings management had been examined on both accrual and real earnings management basis. It appears that in the period of financial crisis firms are less inclined to use accruals for earnings management purposes, while real earnings management is not affected by financial crisis. Yet it seems that the more profitable firms and the firms audited by big auditing firms are less likely to adopt real earnings management practices. In addition, we found that firms’ size and leverage are factors that affect firms’ decision to manage their earnings, either on accrual or real earnings management basis.