Earnings management and impression management: European evidence
-
DOIhttp://dx.doi.org/10.21511/ppm.20(1).2022.37
-
Article InfoVolume 20 2022, Issue #1, pp. 459-472
- Cited by
- 752 Views
-
444 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This study explores the relationship between Earnings Management and Impression Management in the context of some European listed companies. The analysis focuses on the readability of annual reports, measured by the file size. Earnings management is assessed using the modified Jones model. The sample consists of 2,953 listed companies from 17 industries of 24 European countries between 2012 and 2018 resulting in 13,020 firm-year observations. It has been found that one standard deviation increase in financial reports file size increases discretionary accruals in around 4%. These results are robust across different sample specifications in terms of firms’ size, industry and country. The findings show that increased intensity in the use of discretionary accruals is obfuscated by the disclosure of less readable annual reports, implying that Earnings Management and Impression Management are used complementarily. The conclusions have impact both for investment management and for policy, preventing inefficient allocation of capital budgeting and providing additional information that improves regulation on financial reporting transparency.
Acknowledgment
The authors are grateful to financial support from FCT – Fundação para a Ciência e Tecnologia (Portugal), national funding through research grant (UID/SOC/04521/2020).
- Keywords
-
JEL Classification (Paper profile tab)G30, M21, M41, O52
-
References56
-
Tables4
-
Figures2
-
- Figure 1. Average electronic file size by country
- Figure 2. Average electronic file size by industry
-
- Table 1. Descriptive statistics
- Table 2. Relationship between earnings management and impression management
- Table 3. Influence of predominant countries and industries, company size and reporting operating profit or loss
- Table A1. Variables description
-
- Aerts, W. (2001). Inertia in the attributional content of annual accounting narratives. The European Accounting Review, 10(1), 3-32.
- Aerts, W. (2005). Picking up the pieces: Impression management in the retrospective attributional framing of accounting outcomes. Accounting, Organizations and Society, 30(6), 493-517.
- Aerts, W., & Cheng, P. (2011). Causal disclosures on earnings and earnings management in an IPO setting. Journal of Accounting and Public Policy, 30(5), 431-459.
- Aerts, W., & Zhang, S. (2014). Management’s causal reasoning on performance and earnings management. European Management Journal, 32(5), 770-783.
- Ajina, A., Laouiti, M., & Msolli, B. (2016). Guiding through the Fog: Does annual report readability reveal earnings management? Research in International Business and Finance, 38, 509-516.
- Ali, A., & Zhang, W. (2015). CEO tenure and earnings management. Journal of Accounting and Economics, 59(1), 60-79.
- Baginski, S., Hassell, J., & Hillison, W. (2000). Voluntary causal disclosures: Tendencies and capital market reaction. Review of Quantitative Finance and Accounting, 15(4), 371-389.
- Bettman, J. R., & Weitz, B. A. (1983). Attributions in the Board Room: Causal Reasoning in Corporate Annual Reports. Administrative Science Quarterly, 28(2), 165-183.
- Bloomfield, R. (2008). Discussion of “Annual report readability, current earnings, and earnings persistence.” Journal of Accounting and Economics, 45(2-3), 248-252.
- Bowen, R. M., Davis, A. K., & Matsumoto, D. A. (2005). Emphasis on Pro Forma versus GAAP Earnings in Quarterly Press Releases: Determinants, SEC intervention, and Market Reactions. The Accounting Review, 80(4), 1011-1038.
- Brennan, N., & Merkl-Davies, D. M. (2013). Accounting Narratives and Impression Management, In L. Jack, J. Davison, & R. Craig (Eds.), The Routledge Companion to Communication in Accounting (pp. 109-132). London: Routledge.
- Brennan, N., Guillamon-Saorin, E., & Pierce, A. (2009). Impression management: developing and illustrating a scheme of analysis for narrative disclosures – a methodological note. Accounting, Auditing & Accountability Journal, 22(5), 789-832.
- Clapham, S. E., & Schwenk, C. R. (1991). Self-serving attributions, managerial cognition, and company performance. Strategic Management Journal, 12(3), 219-229.
- Clatworthy, M. A., & Jones, M. J. (2006). Differential patterns of textual characteristics and company performance in the chairman’s statement. Accounting, Auditing & Accountability Journal, 19(4), 493-511.
- Clatworthy, M., & Jones, M. J. (2001). The effect of thematic structure on the variability of annual report readability. Accounting, Auditing & Accountability Journal, 14(3), 311-326.
- Clatworthy, M., & Jones, M. J. (2003). Financial reporting of good news and bad news: evidence from accounting narratives. Accounting and Business Research, 33(3), 171-185.
- Courtis, J. K. (1995). Readability of annual reports: Western versus Asian evidence. Accounting, Auditing & Accountability Journal, 8(2), 4-17.
- Courtis, J. K. (2004a). Corporate report obfuscation: artefact or phenomenon? The British Accounting Review, 36(3), 291-312.
- Courtis, J. K. (2004b). Colour as visual rhetoric in financial reporting. Accounting Forum, 28(3), 265-281.
- Dale, E., & Chall, J. S. (1948). A formula for predicting readability. Education Research Bulletin, 27(1), 37-54.
- Davidson, W. N., Jiraporn, P., Kim, Y. S., & Nemec, C. (2004). Earnings management following duality-creating successions: Ethnostatistics, impression management, and agency theory. Academy of Management Journal, 47(2), 267-275.
- Davison, J. (2008). Rhetoric, repetition, reporting and the “dot.com” era: words, pictures, intangibles. Accounting, Auditing & Accountability Journal, 21(6), 791-826.
- Dechow, P. M., G., Sloan R., & Sweeney, A. P. (1995). Detecting Earnings Management. The Accounting Review, 70(2), 193-225.
- DuBay, W. (2007). Unlocking Language. Charleston, South Carolina: BookSurge Publishing.
- Feldman, R., Govindaraj, S., Livnat, J., & Segal, B. (2010). Management’s tone change, post earnings announcement drift and accruals. Review of Accounting Studies, 15(4), 915-953.
- Gioia, D. A., Schultz, M., & Corley, K. G. (2000). Organizational identity, image, and adaptive instability. Academy of Management Review, 25(1), 63-81.
- Godfrey, J., Mather, P., & Ramsay, A. (2003). Earnings and Impression Management in Financial Reports: The Case of CEO Changes. Abacus, 30(1), 95-123.
- Gonçalves, T. C. (2022). The Impact of Discretionary Measurement Criteria on Investors’ Judgement and Decisions. Games, 13(1), 3.
- Gonçalves, T., Barros, V., & Serra, G. (2022). Political elections uncertainty and earnings management: Does firm size really matter? Economics Letters, 110438.
- Gonçalves, T., Gaio, C., & Ferro, A. (2021). Corporate Social Responsibility and Earnings Management: Moderating Impact of Economic Cycles and Financial Performance. Sustainability, 13(17), 1-15.
- Gonçalves, T., Gaio, C., & Lélis, C. (2020). Accrual mispricing: Evidence from European sovereign debt crisis. Research in International Business and Finance, 52, 101-111.
- Gonçalves, T., Gaio, C., & Santos, T. (2019). Women on the board: Do they manage earnings? Empirical evidence from European listed firms. Review of Business Management, 21, 582-597.
- Guay, W., Samuels, D., & Taylor, D. (2016). Guiding through the Fog: Financial statement complexity and voluntary disclosure. Journal of Accounting and Economics, 62(2-3), 234-269.
- Guillamón-Saorín, E., & Osma, B. G. (2010). Self-serving financial reporting communication: A study of the association between earnings management and impression management. Universidad Carlos III de Madrid.
- Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7(1-3), 85-107.
- Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365-383.
- Holthausen, R. W., & Leftwich, R. W. (1983). The economics consequences of accounting choice: Implications of Costly Contracting and Monitoring. Journal of Accounting and Economic, 5, 77-117.
- Hyland, K. (1998). Exploring Corporate Rhetoric: Metadiscourse in the CEO’s Letter. Journal of Business Communication, 35(2), 224-244.
- Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305-360.
- Jones, J. J. (1991). Earnings Management During Import Relief Investigations. Journal of Accounting Research, 29(2), 193-228.
- Knee, C. R., & Zuckerman, M. (1996). Causality orientations and the disappearance of the self-serving bias. Journal of Research in Personality, 30(1), 76-87.
- Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163-197.
- Leary, M. R., & Kowalski, R. M. (1990). Impression management: a literature review and two-component model. Psychological Bulletin, 107(1), 34-47.
- Li, F. (2008). Annual Report Readability, Current Earnings, and Earnings Persistence. Journal of Accounting and Economics, 45(2-3), 221-247.
- Lo, K., Ramos, F., & Rogo, R. (2017). Earnings management and annual report readability. Journal of Accounting and Economics, 63(1), 1-25.
- Loughran, T., & McDonald, B. (2014). Measuring Readability in Financial Disclosures. The Journal of Finance, 69(4), 1643-1671.
- Merkl-Davies, D. M., & Brennan, N. M. (2007). Discretionary disclosure strategies in corporate narratives: incremental information or impression management. Journal of Accounting Literature, 26, 116-196.
- Neu, D. (1991). Trust, impression management and the public accounting profession. Critical Perspectives on Accounting, 2(3), 295-313.
- Neu, D., Warsame, H., & Pedwell, K. (1998). Managing public impressions: Environmental disclosures in annual reports. Accounting Organizations and Society, 23(3), 265-282.
- Rutherford, B. A. (2003). Obfuscation, textual complexity and the role of regulated narrative accounting disclosure in corporate governance. Journal of Management and Governance,7(2), 187-210.
- Salancik, G. R., & Meindl, J. R. (1984). Corporate Attributions as Strategic Illusions of Management Control. Administrative Science Quarterly, 29(2), 238-254.
- Schipper, K. (1989). Commentary: earnings management. Accounting Horizons, 3(4), 91-102.
- Schleicher, T., & Walker, M. (2010). Bias in the tone of forward-looking narratives. Accounting and Business Research, 40(4), 371-390.
- Schlenker, B. R. (1980). Impression management: The self-concept, social identity, and interpersonal relations. Monterey: Brooks/Cole.
- Tekfi, C. (1987). Readability formulas: an overview. Journal of Documentation, 43(3), 261-273.
- Wagner, J. A., & Gooding, R. Z. (1997). Equivocal information and attribution: an investigation of patterns of managerial sensemaking. Strategic Management Journal, 18(4),175-286.