European Financial and Accounting Journal
European Financial and Accounting Journal
European Financial and Accounting Journal
Faculty of Finance and Accounting, University of Economics, Prague

European Financial and Accounting Journal 2018/4

Earnings Discontinuity as the Proxy for Earnings Management: Empirical Study from the UK, Germany and the Czech Republic

DOI: https://doi.org/10.18267/j.efaj.217

[full text (PDF)]

Jan Svitlík, Marcela Zárybnická Žárová

The paper deals with the phenomenon of earnings discontinuity around zero level in the UK, as the common law representative, Germany, as the civil law representative, and the Czech Republic, as the civil law representative where earnings management research has not yet been thoroughly realized. We undertake both cross-sectional and time-series analysis from 2006 to 2013. According to our findings, the UK is a low-earnings-management country with slightly decreasing trend of the earnings management level. On the other hand, earnings management engagement in Germany and the Czech Republic is of a significantly higher level than in the UK. Moreover, Czech companies suggest an increasing trend of the earnings management level. We find significant difference between the common law representative and the civil law ones in terms of the earnings management level.

Keywords: Czech Republic, Earnings Discontinuity, Earnings Management, Germany, United Kingdom

JEL Classification: M41

References:

Altintas, N., Yilmaz, F., 2012. The Accounting Profession: A Descriptive Study of the Common and Code Law Countries. Journal of Modern Accounting and Auditing 8, 932-950.

Aussenegg, W., Inwinkl, P., Schneider, G., 2009. Earnings management and accounting standards in Europe. Proceedings of the 2009 MFA Annual Meeting, Chicago, Illinois, USA.

Bromwich, M., Hopwood A. G., 1992. Accounting and the Law. Prentice hall, London.

Burgstahler, D. C., Dichev, I., 1997. Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics 24, 99-126. DOI: 10.1016/s0165-4101(97)00017-7.

Burgstahler, D. C., Hail, L., Leuz, C., 2014. The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms. The Accounting Review 81, 983-1016. DOI: 10.2308/accr.2006.81.5.983.

Coppens, L., Peek, E., 2005. An analysis of earnings management by European private firms. Journal of International Accounting, Auditing and Taxation 14, 1-17. DOI: 10.1016/j.intaccaudtax.2005.01.002.

Dainow, J., 2013. The Civil Law and The Common Law: Some Points of Comparison. The American Journal of Comparative Law 15, 419-435. DOI: 10.2307/838275.

Day, R., 2000. UK accounting regulation: An historical perspective. Working Paper. Bournemouth University School of Finance and Law, Poole, UK.

Dechow, P. M., Sloan, R. G., Sweeney, A. P., 1995. Detecting Earnings Management. The Accounting Review 70, 193-225.

Geurts, M., 2010. Earnings management in European private firms. Master’s thesis. University of Amsterdam, The Netherlands.

Harris, D., Shi, L., 2014. Why Are Earnings Distributions Kinky: Upwards Earnings Management by Small-Profit Firms or Income Smoothing by Many Firms? Working paper. Syracuse University, New York, USA.

Hayn, C., 1995. The Information Content of Losses. Journal of Accounting and Economics 20, 125-153. DOI: 10.1016/0165-4101(95)00397-2.

Hermida, J., 2004. Convergence of civil Law and common Law Contracts in the Space Field. Hong Kong Law Journal 34, 32. DOI: 10.2139/ssrn.1429664.

Jindrichovska, I., 2004. International Differences in Accounting: The Birth of an Accounting Harmonization Process? Working Paper for the conference “Trendy ve vyuce ucetnictvi na vysokych skolach neuniverzitniho smeru” organized by Soukroma vysoka skola ekonomickych studii, Prague.

Jones, J. J., 1991. Earnings Management During Import Relief Investigations. Journal of Accounting Research 29, 193. DOI: 10.2307/2491047.

Kang, S., 1999. A Conceptual and Empirical Evaluation of Accrual Prediction Models. Working paper. George Washington University, Washington D.C., USA.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R. W., 1998. Law and Finance. Journal of Political Economy 106, 1113-1155. DOI: 10.1086/250042.

Leuz, C., Nanda, D., Wysocki, P. D., 2003. Earnings management and investor protection: an international comparison. Journal of Financial Economics 69, 505-527. DOI: 10.1016/s0304-405x(03)00121-1.

Lindahl, F., Schadewitz H., 2013. Are Legal Families Related to Financial Reporting Quality? Abacus: A Journal of Accounting, Finance and Business Studies 49, 242-267. DOI: 10.1111/abac.12008.

Marinakis, P., 2011. An investigation of earnings management and earnings manipulation in the UK. PhD thesis. University of Nottingham, UK.

Messitte, P. J., 1999. Common law v. civil law systems. USIS, Issues of Democracy, September 1999.

Mikova, T., 2015. IFRS Influence on Financial Reporting Quality. PhD thesis. University of Economics in Prague, the Czech Republic.

Moreira, J. A. C., Pope, P. F., 2007. Earnings Management to Avoid Losses: a cost of debt explanation. Working paper. Universidade do Porto, Portugal.

Nobes, C., Parker, R. H., 2012. Comparative international accounting. Pearson Education, London.

Roberts, C., Weetman, P., Gordon, P., 2005. International Financial Reporting: A Comparative Approach. Pearson Education, London.