Earnings Management in European Private Firms versus Public Firms

  • Jingwen Yang


This thesis presents three papers which empirically investigate earnings management (EM) in European private and public firms. Highlighting the importance of private firms, according to the Federation of European Accountants (2016), there are 99% of firms which are registered as private firms, and are considered as the backbone of the European economy. Similarly, there
are around 29 million private firms in the U.S., which account for 86% of U.S. firms and generate almost one-half of the nation’s GDP. To date there is limited evidence about private firms’ EM activities. The thesis attempts to fill this gap by not only analysing EM in private firms, but also by comparing the EM of private firms with that of public firms, and in so doing, assesses whether determinants of EM are similar for both types of firms. The sample used in this study comprises both private and public firms domiciled in 11 European countries for
which consolidated financial statements are available for the period from 2001 to 2013. These countries are Belgium, Finland, France, Germany, Greece, Italy, The Netherlands, Portugal, Spain, Sweden, and the U.K. In developing the testable hypotheses, the study employs several theoretical frameworks related to EM including the ‘opportunistic behaviour’ and ‘demand’ theories.
The main aim of the first paper is to assess the extent of EM for private and public firms domiciled in Europe. In particular, this paper examines the degree of EM for both private and public firms by considering, in part, the influence of country-level factors including legal enforcement, investor protection and tax systems, as well as the adoption of IFRS. The empirical results show that private firms are more likely to engage in EM than public firms, and the effects of IFRS in lowering EM is more pronounced for public firms than for private firms. Furthermore, country-level factors including legal enforcement, investor protection rules and tax rates are important determinants of EM. Given that enhancing country-level legal enforcement systems and investor protection may reduce the use of EM further in both private and public firms, the current study suggests that standard-setters should consider some of the country-level variables to better guarantee the quality of accounting information across
The second paper examines the accrual based EM of private and public firms domiciled in Europe, and questions whether IFRS adoption has improved EM. The paper further examines whether EM between private and public firms differs in the following three scenarios (i) due to the need to meet earnings benchmarks, (ii) when obtaining external financing and (iii) when VI the firm employs a Big4 auditor. The results suggest public firms, in general, have lower EM and report more conservatively than private firms. This result is consistent with the argument that on average public firms need to provide higher quality financial information to investors and other stakeholders relative to private firms. However, the finding suggest public firms’ lower EM is mitigated or decreased in the three settings mentioned above. Finally, this paper observes that the EM of public firms has decreased post-IFRS adoption, supporting the view that IFRS has improved the financial reporting quality of public firms.The third paper assesses the degree of real earnings management (REM) for private and public
firms domiciled in Europe. This paper further examines some settings that present clear incentives to manage earnings such as (i) to meet earnings benchmarks, (ii) when obtaining external financing, (iii) when leverage is high, and (iv) when losses are large. The empirical results show that public firms engage in more earnings management through real operating activities, and that REM in public firms increased following IFRS adoption, relative to private
firms. Furthermore, this study finds that public firms, overall, face stronger incentives to manage earnings than do private firms’ managers in the four settings mentioned above. The study contributes not only to the EM literature on non-accrual earnings management, but also the current debate on IFRS adoptions.


Original languageEnglish
Awarding Institution
Award date2018