The effect of industry level characteristics and cross-country differences on earnings management: A European comparative perspective

Abstract

The current study examines the direction and intensity of the earnings management phenomenon in the firms of four European countries. More specifically, a multiple regression analysis (panel data) is used to investigate firm-level, industry level, and cross-country differences due to different institutional and legal frameworks with respect to corporate governance. Employing a sample of United Kingdom (UK), German, French, and Italian firms for the period 2010–2019 we estimate the intensity of the earnings management phenomenon using, as a proxy, the magnitude of discretionary accruals. Two models were adopted to analyze the data, namely the modified Jones model (Dechow et al., 1995) and the model of Dechow and Dichev (2002) (DD), as modified by McNichols (2002). Our results indicate that Italian firms exhibit a greater degree of earnings management, followed by German, French, and UK firms. In particular, code law countries manipulate their earnings to a greater extent compared to common law countries (Jiang et al., 2018; Balios et al., 2020). Additionally, our empirical findings suggest that the phenomenon is more intense in competitive industry environments (Datta et al., 2013; Markarian & Santalo, 2014). Sensitivity tests indicate that both firm-specific characteristics and the regulatory framework of each country should be taken into account when assessing the earnings management phenomenon.