DETECTING EARNINGS MANAGEMENT INVESTIGATION ON DIFFERENT MODELS MEASURING EARNINGS MANAGEMENT FOR EMERGING EASTERN EUROPEAN COUNTRIES

Abstract

Earnings management has received considerable attention as numerous papers were investigated different hypotheses. However, there is still no consensus on how efficiently detect and measure earnings managements. Nevertheless, most authors use methodology based on accruals, sophisticated models that attempt to separate total accruals into discretionary and nondiscretionary components. We may find wide range of use of alternative models to measure earnings management. Nevertheless, the researchers typically used five the most popular models: the Jones (1991) model, the modified Jones model (Dechow, Sloan, and Sweeney, 1995), Teoh, Welch and Wong (1998) model, Kasznik (1999) model and Kothari et al. (2005) model. However, it is confirmed that the environment where the company is operating influences on the earnings management. Therefore, we focus our study on the growing market of the developing European countries. In particular, our analysis comprises four different and independent samples from emerging Eastern European countries: Poland, Hungary, Slovakia and the Czech Republic, since earnings management in Eastern European countries is still barely explored. Consequently, our objective is to evaluate the ability of the existing models on earnings management for the environment of countries from the East of Europe. Our results confirm that the Jones (1991), Shivakumar (1996), Kasznik (1999) and Yoon and Miller model (2002) offers the most reliable results for detecting earnings management in emerging Eastern European post-communism economic environment. Additionally, based on broad analyses the results indicate that there is no superiority of the cross-sectional models vis-à-vis their time-series counterparts. Both methodologies are consistent in detecting earnings management for Eastern European companies. Therefore, we verified the importance of the previous evaluation of the ability of each model for detecting earnings management before its application. It is because each economic environment has different peculiarities and circumstances, as observed in case of our developing European countries.