Earnings management in European real estate firms during crisis periods

Abstract

PurposeIn periods of economic distress, expectations for businesses change and there is a heightened need for reporting quality. This study investigates the impact of crises on earnings management in the real estate sector.Design/methodology/approachThe data consisted of financial statements from 2005 to 2021 from real estate firms listed on 10 European stock exchanges. Estimated discretionary accruals from four standard accruals models were used as a proxy for earnings management, using cross-sectional industry and firm fixed effects models. The authors examined earnings management during three crises: the financial crisis (2008–2009), the debt crisis (2011–2012) and the COVID-19 pandemic (2020–2021).FindingsThe results showed less earnings management during the COVID-19 crisis and more earnings management during the financial crisis, though with slightly weaker evidence. The authors did not find significant evidence of earnings management related to the debt crisis. These results suggest that stakeholders in the real estate sector should be extra vigilant in crisis periods.Originality/valueThis study is the first to investigate earnings management in European real estate firms, focusing on the impact of crises.

Housing Developers’ Heterogeneous Decision-Making under Negative Shock after the High-Growth Era: Evidence from the Chinese Real Estate Economy

“…The other reason for aggressive expansion could be revenue recognition, which is also related to the issue of earning manipulation. Developers are incentivized to have aggressive revenue recognition when their performance is unsatisfactory [37,38] and a slower recognition when they need to smooth their earnings. Based on the developers' incentives, their accounting performance becomes a less reliable indicator of the developer's firm-level behaviors.…”