The effect of corruption on the level of real and accrual earnings management in cases of target firms

Abstract

PurposeThis paper attempts to investigate the effect of corruption on the real and accrual earnings management of target firms in the process of mergers and acquisitions.Design/methodology/approachThe sample includes target firms from the European area that participate in mergers or acquisitions announced during 2010–2020. The preliminary empirical part estimates the level of earnings management during the period two years before the deal's announcement to identify whether the sample follows the manipulation behavior that the literature suggests for target firms. The primary empirical analysis focuses on the impact of corruption on real and accrual-based earnings management proxies, employing regression models and two alternative proxies for corruption. The existing literature points out that the combination of low levels of corruption and an integrated legal system reduces earnings manipulation.FindingsThe findings provide strong evidence for systematic downwards accounting manipulation practices, whereas the findings for real earnings management are not significant. The findings of the main empirical part show that corruption is positively associated with accrual-based manipulation and negatively related to real earnings management. In essence, in economies with a high level of transparency, managers adopt the manipulation of operating activities as a less detectable practice of earnings management instead of engaging in accounting procedures.Originality/valueThis study contributes to the literature highlighting the diversification of these firms' manipulation strategies according to the national level's corruption status.