Does the corporate life cycle affect earnings management? Evidence from Central European countries

Department of Economics, Faculty of Operation and Economics of Transport and Communications, University of Zilina, Univerzitna 1, 010 26 Zilina, Slovakia

^* Corresponding author: lucia.michalkova@fpedas.uniza.sk

Abstract

Research background: Earnings manipulations are a global phenomenon, the aim of which is not only to improve the financial position in accordance with Positive Accounting Theory, but also other goals of the company in accordance with the management strategy. However, the diversity of the company’s goals along with the corporate life cycle are crucial factors influencing the quality of corporate earnings and the existence, scope and application of downward and upward earnings management.

Purpose of the article: The aim of the paper is to comprehensively analyse and verify the existence and extent of downward and upward earnings management in Central European countries with an emphasis on differences between countries and between life cycle stages.

Methods: The study uses Mann-Whitney test and binomial test to verify the existence and extent of downward and upward earnings management. The sample covers discretionary accruals for 2019 estimated by modified Jones and Teoh, et al. models from almost 3,500 companies from four Central European countries.

Findings & Value added: The results show that, depending on the life cycle stage or country, companies manipulate profits, but the application of a specific type of earnings management and its scope vary significantly within countries and life cycle stages. Lifecycle manipulation earnings are U-shaped, meaning that start-ups and declining companies use, on average, more significant upward earnings management. On the contrary, mature companies reduce their accounting profit. Nevertheless, the share of companies using upward earnings management is higher than companies with downward earnings management.