Accrual-based earnings management in state owned companies

Abstract

Purpose -Opposition to transnational calls for the adoption of accrual-based accounting in the public sector may stem from arguments that it is associated with poor earnings quality. The purpose of this paper is to determine whether state owned enterprises (SOEs) operating under accrual-based accounting manage their earnings, whether it is more prevalent vis-a`-vis privately owned enterprises (POEs) and the conditions under which it is more likely to occur. Design/methodology/approach -This paper measures earnings management for a large sample of unlisted Italian SOEs and POEs using a framework developed by Stubben (2010). The authors use regression analysis to estimate the variables which predict abnormal accruals including firm size, leverage and profitability. Findings -The authors find no evidence that the level of state ownership (SO) is positively correlated with accrual-based earnings management. The authors also provide evidence that earnings management by SOEs decreases with firm size and increases with profitability. Research limitations/implications -While the study is the first to examine earnings management in a public sector accrual accounting environment for a sample of European firms, namely Italian firms, the authors call for more research into this issue examining public entities in other European Union (EU) member states or public entities other than SOEs. Practical implications -The EU recently introduced a new transnational accounting directive in which it prescribes the preparation of financial statements based on accrual accounting for all European public sector entities, arguing that it reduces the window dressing that is allowed by cash accounting. Since Italian SOEs already prepare their accounts on an accruals-basis, by analysing their accounting behaviour the authors are able to determine the variables which predict when earning management is more likely to occur in a public sector accrual accounting environment, and therefore the authors provide guidance which may be useful in shaping the transition process from cash accounting to accrual accounting by identifying the types of entities whose accounts should be subject to greater regulatory scrutiny. A better understanding of the relation between SO and earnings management will provide insight into public sector corporate governance and aid in the acceptance of transnational regulation that would otherwise significantly alter current accounting practices and possibly be opposed at a national level.

Do Ownership Structure Characteristics Affect Italian Private Companies’ Propensity to Engage in the Practices of “Earnings Minimization” and “Earnings Change Minimization”?

“…As a result, our third research hypothesis is confirmed. However, our findings contrasts with those of Capalbo et al (2014). They found that, in Italy, state-owned companies manage earnings less frequently than privately-owned companies.…”

“…Conversely, Aharony et al (2000), Chen and Yuan (2004) and Liu and Lu (2007) have found that state-owned companies manage earnings more than privately-owned ones do. Recently, Capalbo, Frino, Mollica, and Palumbo (2014) have investigated Italian private companies, finding that state-owned companies manage earnings less than privately-owned ones do. Thus, all previous studies have shown that state ownership and earnings management practices are associated, but the sign of this association is divergent.…”

Estimating accruals models in Europe: industry-based approaches versus a data-driven approach

“…Our data show that, if a researcher wishes to investigate the Italian capital market, which is the smallest in our study but one of the largest in the EU, they will estimate AAs for only 43% of the potentially available observations using the 2SICy approach. In response, either an industry classification wider than the two-digit SIC code is used to estimate the accruals models cross-sectionally (e.g., Athanasakou et al, 2009;Gore et al, 2007;Lapointe-Antunes, Cormier, Magnan, & Gay-Angers, 2006;Lehmann, 2016;Sáenz González & García-meca, 2014;Saleh & Ahmed, 2005;Simpson, 2013;Van Tendeloo & Vanstraelen, 2008) or alternative techniques are employed to identify AAs (e.g., Capalbo, Frino, Mollica, & Palumbo, 2014;DeFond & Park, 2001;Francis & Wang, 2008;Ittonen, Johnstone, & Myllymäki, 2015;Jansen, Ramnath, & Yohn, 2012;Zerni, Haapamäki, Järvinen, & Niemi, 2012).…”

Is gender diversity in ownership structure related to private Italian companies propensity to engage in earnings management practices?

“…Previous studies have focused on specific types of owners, such as institutional investors (Almazan et al, 2005;Bange and De Bondt, 1998;Bushee, 1998;Chung et al, 2002;Claessens and Fan, 2002;Cornett et al, 2008;Duggal and Millar, 1999;Ebrahim, 2007;Koh, 2003;Porter, 1992;Pound, 1988;Sundaramurthy et al, 2005), public authorities (Aharony et al, 2000;Capalbo et al, 2014;Chen and Yuan, 2004; E-mail: s.poli@univ pm.it. Tel: +39 0712207258.…”