Accounting Conservatism and Earnings Management: Moderating Effect of the Corporate Life Cycle

2021 ◽

Vol 129 ◽

pp. 03020

Author(s):

Lucia Michalkova

Keyword(s):

Life Cycle ◽

Earnings Management ◽

Value Added ◽

Life Cycle Stage ◽

European Countries ◽

Central European ◽

Life Cycle Stages ◽

Corporate Earnings ◽

Corporate Life Cycle ◽

Start Ups

Research background: Earnings manipulations are a global phenomenon, the aim of which is not only to improve the financial position in accordance with Positive Accounting Theory, but also other goals of the company in accordance with the management strategy. However, the diversity of the company’s goals along with the corporate life cycle are crucial factors influencing the quality of corporate earnings and the existence, scope and application of downward and upward earnings management. Purpose of the article: The aim of the paper is to comprehensively analyse and verify the existence and extent of downward and upward earnings management in Central European countries with an emphasis on differences between countries and between life cycle stages. Methods: The study uses Mann-Whitney test and binomial test to verify the existence and extent of downward and upward earnings management. The sample covers discretionary accruals for 2019 estimated by modified Jones and Teoh, et al. models from almost 3,500 companies from four Central European countries. Findings & Value added: The results show that, depending on the life cycle stage or country, companies manipulate profits, but the application of a specific type of earnings management and its scope vary significantly within countries and life cycle stages. Lifecycle manipulation earnings are U-shaped, meaning that start-ups and declining companies use, on average, more significant upward earnings management. On the contrary, mature companies reduce their accounting profit. Nevertheless, the share of companies using upward earnings management is higher than companies with downward earnings management.

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The Effect Of Accounting Conservatism And Life-Cycle Stages On Firm Valuation

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v22i3.1428 ◽

2011 ◽

Vol 22 (3) ◽

Author(s):

Yonpae Park ◽

Kung H. Chen

Keyword(s):

Life Cycle ◽

Value Relevance ◽

Accounting Information ◽

Life Cycle Stage ◽

Joint Effect ◽

Accounting Conservatism ◽

Valuation Model ◽

Conservative Accounting ◽

Life Cycle Stages ◽

Corporate Life Cycle

This paper investigates how accounting conservatism affects the value-relevance of accounting information under different economic attributes. A firm’s value is driven by the underlying economics, such as its production function, investment opportunity set, and risk. The corporate life-cycle stage can capture general differences in these underlying economics. From the perspective of the Feltham and Ohlson (1995)’s valuation model, this suggests that firms in different life-cycle stages have different financial characteristics that affect the value-relevance of the accounting information. Their valuation model depicts theoretically that, under conservative accounting, the expected growth in net operating assets affects a firm’s market valuation. This paper predicts that the pricing multiples of the value components of the valuation model will differ in different corporate life-cycle stages and accounting conservatism will have a joint effect with the life-cycle stage on the value-relevance of accounting information. This study conducts its hypothesis tests using comprehensive proxies such as conservatism estimates from the valuation model and corporate life-cycle stages.  These enable this study to examine the overall effects of accounting information, accounting conservatism as well as economic attributes on firm value. According to those comprehensive proxies, sample firms are classified into two conservatism groups, and three life-cycle stages. The results of this study provide evidence that accounting conservatism has a joint effect with the life-cycle stage on the value-relevance of accounting information.

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Earnings Management and Future Operating Performance on the Corporate Life Cycle

Korea International Accounting Review ◽

10.21073/kiar.2017..74.005 ◽

2017 ◽

Vol null (74) ◽

pp. 99-130

Author(s):

황인옥 ◽

Jung-Kyo Kim

Keyword(s):

Life Cycle ◽

Earnings Management ◽

Operating Performance ◽

Corporate Life Cycle

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Impact of Earnings management on Firm Value in the Corporate Life Cycle

Accounting Information Review ◽

10.29189/kaiaair.37.2.1 ◽

2019 ◽

Vol 37 (2) ◽

pp. 1-27

Author(s):

Jiyeon Han ◽

Sujin Sin ◽

Seongho Bae

Keyword(s):

Life Cycle ◽

Earnings Management ◽

Firm Value ◽

Corporate Life Cycle

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When Does Earnings Management Matter? Evidence across the Corporate Life Cycle for Non-Financial Chinese Listed Companies

Journal of Risk and Financial Management ◽

10.3390/jrfm13120313 ◽

2020 ◽

Vol 13 (12) ◽

pp. 313 ◽

Cited By ~ 1

Author(s):

Ammar Hussain ◽

Minhas Akbar ◽

Muhammad Kaleem Khan ◽

Ahsan Akbar ◽

Mirela Panait ◽

...

Keyword(s):

Life Cycle ◽

Panel Data ◽

Earnings Management ◽

Fixed Effects ◽

Management Practices ◽

Real Earnings Management ◽

Earning Management ◽

Bankruptcy Risk ◽

Corporate Managers ◽

Corporate Life Cycle

Information availability, firm performance, idiosyncratic volatility and bankruptcy-risk vary across the Corporate Life Cycle (CLC) stages. The purpose of this paper is to examine whether CLC stages explain firm’s propensity to engage in both accrual base and real earning management practices in the context of China. Panel data of 3250 non-financial Chinese listed firms spanning from 2009 to 2018 is used to investigate the proposed relationship. CLC stages were captured through Dickinson’s model, while earnings management is measured by employing both techniques, i.e., accruals-base earnings management and real earnings management. The data were analyzed through Panel data fixed-effects and random-effects techniques. Results reveal that, when compared to shakeout phase, managers’ response to use both earnings management practices is significantly higher during introduction and decline phases, and lower during growth and mature stages of CLC. It suggests that introductory and later-staged firms distort their factual financial information from creditors to obtain loans without strict debt covenants. Our results are robust to alternate measures and specifications. The core contribution of this research is to add a fresh perspective to the CLC research by uncovering its imperative role in influencing the earning management behavior of corporate managers.

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Does the life cycle affect earnings management and bankruptcy?

Oeconomia Copernicana ◽

10.24136/oc.2021.015 ◽

2021 ◽

Vol 12 (2) ◽

pp. 425-461

Author(s):

Pavol Durana ◽

Lucia Michalkova ◽

Andrej Privara ◽

Josef Marousek ◽

Milos Tumpach

Keyword(s):

Life Cycle ◽

Earnings Management ◽

Financial Performance ◽

Financial Management ◽

Mixed Model ◽

Value Added ◽

Bankruptcy Risk ◽

Corporate Life Cycle ◽

The Impact

Research background: Deteriorating economic conditions and a negative outlook increase the pressure on financial management and the need to show high financial performance. According to Positive Accounting Theory, the growing risk of bankruptcy is associated with the phenomenon of earnings management. Bankruptcy risk and the quality of reported profits, along with other aspects of financial performance, vary throughout the company's life cycle. Nevertheless, these factors or their interactions are investigated only to a very small extent. Purpose of the article: The aim of this study is to clarify the impact of corporate life cycle and bankruptcy on earnings management, in order to describe behaviour of companies at different stages of corporate life cycle. Methods: A hierarchical mixed model with a random time and industry effect was chosen as appropriate because it allows the investigation of multilevel data that is not independent. The sample covers the financial indicators of more than 33,000 Central European companies from 2015?2019. The non-sequential Dickinson model, company age, and three models of accrual earnings management were used as proxies for the company's life cycle and quality of reported profit. Findings & value added: Earnings management and bankruptcy risk have a U-shape, indicating that financially distressed firms reduce reported accounting profit at the Introduction, Decline and, to a lesser extent, at the Growth stage. Slovak and Czech companies manipulate profits to a similar extent, Hungarian companies increase accounting profit to a greatest extent than the surveyed countries by controlling bankruptcy ? life cycle effect; however, the variability of accounting manipulations across industries has not been demonstrated. These findings imply that start-ups and declining businesses provide crooked financial statements to obtain more favourable debt covenants, and estimating discretionary accruals using life-cycle subsamples can improve the predictive power of accrual earnings management models.

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