Earnings Management Across Business Cycle

• In Event: 1.02. Macroeconomic Factors and Earnings Disclosure

Abstract

Prior research has documented that the relation between earnings management and litigation risk and stock returns is sensitive to the business cycle. This study aims to examine whether managers adjust their earnings management strategies to respond to the economic environment changes across business cycles. Using a large sample of 26 countries over a period between 1994 and 2020, we find that managers adopt different strategies to manipulate earnings in different business cycle phases: Expansion, Recession, Contraction, and Recovery. The focal earnings management approach during Expansion and Contraction is accruals-based earnings management (AEM), and during Recession and Recovery is real earnings management (REM). We also find a strong substitution relation between AEM and REM across business cycles. Our findings extend the literature of earnings management by showing that fluctuations in the economic environment motivate this important behavior.

Authors

• Renato Henrique Gurgel Mota, Federal University of Rio Grande do Norte (Brazil)

• Edilson Paulo, Universidade Federal do Rio Grande do Sul

• Giorgio Gotti, University of Texas Rio Grande Valley

• Hong Kim Duong, Old Dominion University