Abstract
This chapter approaches the question of the relationship between financial crisis and earnings management. It presents a review of studies that identified financial crisis as a major cause of earnings management. Previous research on the impact of financial crisis on managers’ earnings management behavior has yielded ambiguous results, depicting different scenarios depending on the choice of firm context/type, and on the start date of the financial crisis. The results show that there is a lack of consensus on the direction and magnitude of earnings management in times of recession. Results of the performed literature review will be operationalized into a hypothesis presented in the following Chap. 5. Therefore, this chapter is essentially propaedeutic to Chap. 5.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
The following keywords were searched in the titles, abstracts, and keywords: Fraud or “earnings manipulation” or “earnings management” or “earnings quality” or “data manipulation” or “financial fraud” or “earnings behavior” or “creative accounting” or “aggressive accounting” or “income smoothing” or “GAAP violation” linked with logical AND to recession or crisis or downturn or depression. The Scopus search was limited to the following subject areas: business, management, and accounting; economics, econometrics, and finance; decision sciences; and social sciences. The Ebsco Host search was further limited by full-text availability.
References
Ahmad-Zaluki NA, Campbell K, Goodacre A (2011) Earnings management in Malaysian IPOs: the East Asian crisis, ownership control, and post-IPO performance. Int J Account 46:111–137. doi:10.1016/j.intacc.2011.04.001
Ahmed K, Godfrey JM, Saleh NM (2008) Market perceptions of discretionary accruals by debt renegotiating firms during economic downturn. Int J Account 43:114–138. doi:10.1016/j.intacc.2008.04.002
Arya A, Glover J, Sunder S (1998) Earnings management and the revelation principle. Rev Acc Stud 3:7–34. doi:10.1023/a:1009631714430
Ashbaugh H, LaFond R, Mayhew BW (2003) Do nonaudit services compromise auditor independence? Further evidence. Account Rev 78:611–639. doi:10.2308/accr.2003.78.3.611
Bange MM, De Bondt WFM (1998) R&D budgets and corporate earnings targets. J Corp Finance 4:153–184. doi:10.1016/s0929-1199(98)00006-6
Barth ME, Landsman WR (2010) How did financial reporting contribute to the financial crisis? Eur Account Rev 19:399–423. doi:10.1080/09638180.2010.498619
Benford F (1938) The law of anomalous numbers. Proc Am Philos Soc 78:551–572
Bhaskar R (1998) The possibility of naturalism: a philosophical critique of the contemporary human sciences. Routledge, New York
Bhaskar R (2008) A realist theory of science. Routledge, New York
Bhaskar R (2011) Reclaiming reality: a critical introduction to contemporary philosophy. Routledge, New York
Bhattacharya U, Daouk H, Welker M (2003) The world price of earnings opacity. Account Rev 78:641–678. doi:10.2308/accr.2003.78.3.641
Bhojraj S, Lee CMC, Oler DK (2003) What’s my line? A comparison of industry classification schemes for capital market research. J Account Res 41:745–774. doi:10.1046/j.1475-679X.2003.00122.x
Bisman J (2010) Postpositivism and accounting research: a (personal) primer on critical realism. Australas Account Bus Finance J 4:3–25
Burgstahler D, Dichev I (1997) Earnings management to avoid earnings decreases and losses. J Account Econ 24:99–126. doi:10.1016/s0165-4101(97)00017-7
Charoenwong C, Jiraporn P (2009) Earnings management to exceed thresholds: evidence from Singapore and Thailand. J Multinatl Financ Manag 19:221–236. doi:10.1016/j.mulfin.2008.12.001
Choi J-H, Kim J-B, Lee JJ (2011) Value relevance of discretionary accruals in the Asian financial crisis of 1997–1998. J Account Public Policy 30:166–187. doi:10.1016/j.jaccpubpol.2010.09.002
Collier A (2005) Philosophy and critical realism. In: Steintmetz G (ed) The politics of method in the human sciences. Duke University Press, Durham, pp 327–345
Cooper HM (1988) Organizing knowledge syntheses: a taxonomy of literature reviews. Knowl Soc 1:104–126. doi:10.1007/bf03177550
Dechow PM, Kothari SP, Watts RL (1998) The relation between earnings and cash flows. J Account Econ 25:133–168. doi:10.1016/s0165-4101(98)00020-2
Dechow PM, Sloan RG, Sweeney AP (1995) Detecting earnings management. Account Rev 70:193–225
DeFond ML, Jiambalvo J (1994) Debt covenant violation and manipulation of accruals. J Account Econ 17:145–176. doi:10.1016/0165-4101(94)90008-6
Degeorge F, Patel J, Zeckhauser R (1999) Earnings management to exceed thresholds. J Bus 72:1–33. doi:10.1086/209601
Eisenhardt KM (1989) Agency theory: an assessment and review. Acad Manag Rev 14:57–74. doi:10.5465/amr.1989.4279003
Goh J, Lee H-Y, Lee J-W (2013) Majority shareholder ownership and real earnings management: evidence from Korea. J Int Financ Manag Account 24:26–61. doi:10.1111/jifm.12006
Greenwald AG, Pratkanis AR, Leippe MR, Baumgardner MH (1986) Under what conditions does theory obstruct research progress? Psychol Rev 93:216–229. doi:10.1037//0033-295x.93.2.216
Guay WR, Kothari SP, Watts RL (1996) A market-based evaluation of discretionary accrual models. J Account Res 34:83–105. doi:10.2307/2491427
Habib A, Bhuiyan BU, Islam A (2013) Financial distress, earnings management and market pricing of accruals during the global financial crisis. Manag Finance 39:155–180. doi:10.1108/03074351311294007
Healy PM, Wahlen JM (1999) A review of the earnings management literature and its implications for standard setting. Account Horizons 13:365–383. doi:10.2308/acch.1999.13.4.365
Hrazdil K, Scott T (2013) The role of industry classification in estimating discretionary accruals. Rev Quant Financ Acc 40:15–39. doi:10.1007/s11156-011-0268-6
Hribar P, Collins DW (2002) Errors in estimating accruals: implications for empirical research. J Account Res 40:105–134. doi:10.1111/1475-679x.00041
Iatridis G, Dimitras AI (2013) Financial crisis and accounting quality: evidence from five European countries. Adv Account 29:154–160. doi:10.1016/j.adiac.2013.03.001
Jaggi B, Tsui J (2007) Insider trading, earnings management and corporate governance: empirical evidence based on Hong Kong firms. J Int Financ Manag Account 18:192–222. doi:10.1111/j.1467-646x.2007.01012.x
Jones JJ (1991) Earnings management during import relief investigations. J Account Res 29:193–228. doi:10.2307/2491047
Kim J-B, Yi CH (2006) Ownership structure, business group affiliation, listing status, and earnings management: evidence from Korea. Contemp Account Res 23:427–464. doi:10.1506/7t5b-72fv-mhjv-e697
Klayman J, Ha Y-W (1987) Confirmation, disconfirmation, and information in hypothesis testing. Psychol Rev 94:211–228. doi:10.1037//0033-295x.94.2.211
Kothari SP, Leone AJ, Wasley CE (2005) Performance matched discretionary accrual measures. J Account Econ 39:163–197. doi:10.1016/j.jacceco.2004.11.002
Kousenidis DV, Ladas AC, Negakis CI (2013) The effects of the European debt crisis on earnings quality. Int Rev Financ Anal 30:351–362. doi:10.1016/j.irfa.2013.03.004
Lee BB, Seo SD (2010) Reforms in the Korean financial reporting systems and earnings quality. Asia-Pacific Financ Mark 17:51–61. doi:10.1007/s10690-009-9101-9
Leuz C, Nanda D, Wysocki PD (2003) Earnings management and investor protection: an international comparison. J Financ Econ 69:505–527. doi:10.1016/s0304-405x(03)00121-1
Locke J (1999 [1690]) An essay concerning human understanding. The Pennsylvania State University, Electronic Classics Series
Mande V, File RG, Kwak W (2000) Income smoothing and discretionary R&D expenditures of Japanese firms. Contemp Account Res 17:263–302. doi:10.1506/QXBV-UY71-A6W1-FWT4
Masruki R, Azizan NA (2010) The impact of Asian financial crisis to earnings management and operating performance in Malaysia. J Int Finance Econ 10:38–46
Miller KD, Tsang EWK (2011) Testing management theories: critical realist philosophy and research methods. Strateg Manag J 32:139–158. doi:10.1002/smj.868
Ming Chia Y, Lapsley I, Lee HW (2007) Choice of auditors and earnings management during the Asian financial crisis. Manag Audit J 22:177–196. doi:10.1108/02686900710718672
Mingers J, Mutch A, Willcocks L (2013) Critical realism in information systems research. MIS Q 37:795–802
Modell S (2009) In defence of triangulation: a critical realist approach to mixed methods research in management accounting. Manag Account Res 20:208–221. doi:10.1016/j.mar.2009.04.001
Nickerson RS (1998) Confirmation bias: a ubiquitous phenomenon in many guises. Rev General Psychol 2:175–220. doi:10.1037//1089-2680.2.2.175
Perry S, Grinaker R (1994) Earnings expectations and discretionary research and develop. Account Horizons 8:43
Povel P, Singh R, Winton A (2007) Booms, busts, and fraud. Rev Financ Stud 20:1219–1254. doi:10.1093/revfin/hhm012
Randolph JJ (2009) A guide to writing the dissertation literature review. Pract Assess Res Eval 14:1–13
Roychowdhury S (2006) Earnings management through real activities manipulation. J Account Econ 42:335–370. doi:10.1016/j.jacceco.2006.01.002
Rusmin R, Scully G, Tower G (2013) Income smoothing behaviour by Asian transportation firms. Manag Audit J 28:23–44. doi:10.1108/02686901311282489
Saleh NM, Ahmed K (2005) Earnings management of distressed firms during debt renegotiation. Account Bus Res 35:69–86. doi:10.1080/00014788.2005.9729663
Seuring S, Müller M (2008) From a literature review to a conceptual framework for sustainable supply chain management. J Clean Prod 16:1699–1710. doi:10.1016/j.jclepro.2008.04.020
Smith M, Kestel J-A, Robinson P (2001) Economic recession, corporate distress and income increasing accounting policy choice. Account Forum 25:334–352. doi:10.1111/1467-6303.00070
Stanovich KE, West RF (2007) Natural myside bias is independent of cognitive ability. Think Reason 13:225–247. doi:10.1080/13546780600780796
Strobl G (2013) Earnings manipulation and the cost of capital. J Account Res 51:449–473. doi:10.1111/1475-679x.12008
Tilden C, Janes T (2012) Empirical evidence of financial statement manipulation during economic recessions. J Finance Account 10:1–15
Vladu AB (2013) Smoothing behavior of firms in times of crisis: empirical evidence from the Spanish economic environment. Annales Universitatis Apulensis: Series Oeconomica 15:473–480
Walsh P, Craig R, Clarke F (1991) ‘Big bath accounting’ using extraordinary items adjustments: Australian empirical evidence. J Bus Finance Account 18:173–189. doi:10.1111/j.1468-5957.1991.tb00587.x
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2018 Springer International Publishing AG
About this chapter
Cite this chapter
Franceschetti, B.M. (2018). Financial Crisis as a Major Cause of Earnings Management: Theoretical Background and Literature Review. In: Financial Crises and Earnings Management Behavior. Contributions to Management Science. Springer, Cham. https://doi.org/10.1007/978-3-319-54121-1_4
Download citation
DOI: https://doi.org/10.1007/978-3-319-54121-1_4
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-54120-4
Online ISBN: 978-3-319-54121-1
eBook Packages: Business and ManagementBusiness and Management (R0)