The impact of COVID-19 pandemic on earnings management and the value relevance of earnings: US evidence

Abstract

Purpose The purpose of this study is to examine whether the COVID-19 pandemic has affected earnings management and the value relevance of earnings in the USA. Design/methodology/approach Discretionary accruals, the explanatory power and slope coefficient of earnings are compared between 2019 (prepandemic year) and 2020 (pandemic year). Univariate and regression analyses are performed. Findings There was a significant decline in discretionary accruals from 2019 to 2020, suggesting that firms engaged in more income-decreasing earnings management to take a big bath in reporting earnings in the pandemic year. Meanwhile, the explanatory power and slope coefficient of earnings both were lower in 2020 than in 2019, consistent with the notion that the pandemic has impaired the value relevance of earnings. Originality/value This study explores the consequences of the pandemic from accounting perspective. It also enriches accounting research on economic crises.