Earnings management, policy uncertainty and firm life cycle stages: evidence from publicly traded companies in the USA and Brazil

Abstract

Purpose This paper aims to investigate the combined effect of economic policy uncertainty (EPU) and the firm life cycle on the degree of accrual-based earnings management of publicly traded companies in the USA and Brazilian stock markets. Design/methodology/approach The EPU index used was the one developed by Baker et al. (2016), the Kothari et al. (2005) model was used in the main analysis to obtain the discretionary accruals and the classification of firms into different life cycles was based on the Dickinson (2011) approach, which relies on the sign of operating, investment and financing cash flows. The methodology includes correlation matrix and panel regression with fixed effects. Findings The overall results for the USA sample suggest that economic policy uncertainty does have a heterogeneous influence on the firms’ accrual earnings management conditional on their life cycle where firms in the introduction, growth and decline stages decrease this practice when policy uncertainty increases. For the Brazilian case, in general, there is no combined effect between these variables. These contrasting findings can be associated with either the different underlying characteristics of both stock markets or the reduced sample size for the emerging market analyzed. Originality/value This research contributes to the earnings management literature examining how policy uncertainty is related to accruals manipulation under different life cycle stages and institutional environments. It is also one of the first studies to explore this conditioning effect.

The mediating mechanism of earnings management on the relationship between life cycle and financial reporting quality: Finding from MRA and fsQCA

“…The max value is 1.291 compared to À0.0000837 (Phuong & Hung, 2020). In term of AEM, the DAs variables (aem_jones and aem_kothari) has mean value of 0.000 and À0.001, respectively, that lower than research of Roma et al (2020) with US firm. Besides, the mean value of firm size by assets after logarithm (size) is 26.948 higher than in the study of Phuong and Hung (2020).…”

“…Kale and Almeida (2019) also proved that businesses in the recession have the poorest accrual quality and that life cycle stages affect accounting decisions. Besides, a vital relationship between OLC and DAs was found, and the degree of EM behaviors is different based on each circumstance (Roma et al, 2020). In the Chinese context, Hussain et al (2020) was found a positive relationship between AEM and the decline stage.…”

Informasi Laba, Aliran Kas dan Harga Saham dalam Kaitannya dengan Siklus Hidup Perusahaan

“…Temuan ini menunjukan bahwa dalam menilai kinerja serta prospek masa depan perusahaan yang berada pada tahap decline, investor lebih menekankan pada aliran kas dari aktivitas operasi. Dalam hal ini aliran kas operasi mengandung informasi tentang kemapuan perusahaan mampu menghasilkan modal atas kegiatan operasinya sendiri, yakni membayar kepada para debitur dalam kasus likuidasi (Roma et al, 2020).…”

Mergers and acquisitions in Brazil and economic uncertainty shocks

“…This uncertainty dimension concerns the unpredictability of the economic policy by government agents, related to who will make the decisions when taken over; and what their future effects on the economy are (Baker et al, 2016). Such uncertainty can change the dynamics of firms' financial decisions, which can delay their investments (Akron et al, 2020;Gulen & Ion, 2015), increase their cash holdings for speculation and precaution (Duong et al, 2020), reduce debt levels (Li & Qiu, 2021), pay more dividends as a form of signaling (Attig et al, 2021) and even reduce earnings management practices depending on their stage in the life cycle (Roma et al, 2020). Specifically, in the case of M&A, empirical evidence for the US suggests that a shock of economic policy uncertainty may negatively affect the volume and value of acquisitions (Bonaime et al, 2018).…”