Earnings Quality and Accruals over Company´S Life Cycle

Abstract

Research background: The increasing number of bankruptcies and the growing risk of financial distress highlight the need for quality financial statements, conservative accounting or increase the need for quality tools to detect the occurrence of earnings management. However, the life cycle of a company affects financial performance and key aspects of earnings management, which examined in the international context only to a small extent. Purpose of the article: The paper examines the impact of the life cycle and country-specific factor on the value of discretionary accruals in the tourism sector in the Visegrad countries, which are among the most vulnerable sectors in the coming economic crisis. Methods: This study uses the method of two-way analysis of variance with interaction, while also testing the assumptions of the model by normality tests, homogeneity test and post hoc tests (Scheffé and Tukey methods). Findings & Value added: Earnings quality changes during the life cycle of a business; whereas in the first stages (introduction, growth) and in decline they use downward earnings management. On the contrary, mature and shake-out companies have enough positive earnings before taxes, which is a prerequisite for tax profit optimization. The level of earnings management in tourism varies significantly at different stages of the life cycle, but also in different countries. The results imply that the qualitative variable corporate life cycle in interaction with the country is an important explanatory variable, the implementation of which can improve the explanatory power of earnings management models in Central European developing countries.

Does the life cycle affect earnings management and bankruptcy?

“…On average, Polish and Hungarian companies increase their accounting profits. The influence of the Czech macro environment is insignificant, which purports that Slovak and Czech companies manipulate profits to a similar extent in accordance with the value of the grand mean in line with Michalkova (2021).…”

Corporate Life Cycle And Financial Performance In Terms Of Emerging Markets

“…Mittal (2020) attributes the variability of R&D to institutional factors. Michalkova (2021) focused on the quality of reported profits in the tourism industry; cash flow patterns play an important role in the context of earnings manipulations and they have an inverted U-shape during the life cycle. These results indicate that the life cycle affects not only the financial performance reported in the accounting figures, but also that expressed in cash flow.…”

“…There are several studies dealing with the business life cycle and its impact on financial management, such as Hussain et al (2020), Gulec and Karacaer (2017), or Tian et al (2015). In the field of Central European emerging economies, this research is represented by only a few studies such as Konecny and Zinecker (2016), Pinkova and Kaminkova (2012) or Michalkova (2021). These studies largely address the impact of a company's life cycle on profitability and earnings management in developing countries, but have several shortcomings.…”

The Relationship between Earnings Benchmarks and Earnings Management across the Stages of a Listed Egyptian Firm’s Life Cycle

“…Most recently, Michalkova (2021) explored the influence of life cycle and country specific factors, as measured by discretionary accrual, on earnings management behaviurs of tourism sector firms in Central European countries (the Czech Republic, Hungary, Poland, and Slovakia). This study used the method of two-way analysis of variance with interaction depending on a sample of 3650 companies in the period from 2018 to 2020.…”