The purpose of this study is to investigate whether earnings management in Italian non-listed firms is opportunistic or efficient. Earnings management is efficient when managers wish to convey private information to investors in order to improve the information content of firm earnings and to promote communication between managers, shareholders and the public (Siregar et al., 2008; Rezaei and Roshani, 2012). In this paper we also investigate the effect of leverage and taxation as well as a range of control variables (size, ownership concentration, board independence and auditor type) on the type of earnings management behaviour. Data We study data for a balanced sample of 1,896 Italian non-listed firms over the period 2006-2012, totalling 13,074 observations. Methods A significant positive relationship between measures of firm future profitability and discretionary accruals signals efficient earnings management practice (Subramanyam, 1996; Siregar and Utama, 2008). We examine both discretionary accruals (Jones, 1991) and Small Positive Earnings (SPOS) in order to measure discretion in reported earnings (Leuz et al., 2003; Coppens and Peek, 2005). We estimate a simple regression model of the relationship between the dependent variable (non-discretionary net income, net income or operating cash flows one-year-ahead) and the independent variables. Results Our results show that type of earnings management chosen by Italian non-listed firms tends towards opportunistic earnings management, as expected. Further, our results indicate that opportunistic earnings management increase as both firm leverage and size increase. Conclusions In this paper we determine the type of earnings management exhibited by Italian non-listed firms, and in particular whether increased leverage and taxation tend to encourage opportunistic earnings management behaviour. In general, we find a significant negative relationship between discretionary accruals and future profitability, and thus earnings management tends to be opportunistic in Italian firms. We also find that leverage and taxation exhibit little relation with future profitability, again indicating the employment of opportunistic earnings management.

Earnings Management and the Effect of Leverage and Taxation: Empirical Evidence from Italian Non-Listed Firms

MATONTI, GAETANO;TOMMASETTI, Aurelio;
2014

Abstract

The purpose of this study is to investigate whether earnings management in Italian non-listed firms is opportunistic or efficient. Earnings management is efficient when managers wish to convey private information to investors in order to improve the information content of firm earnings and to promote communication between managers, shareholders and the public (Siregar et al., 2008; Rezaei and Roshani, 2012). In this paper we also investigate the effect of leverage and taxation as well as a range of control variables (size, ownership concentration, board independence and auditor type) on the type of earnings management behaviour. Data We study data for a balanced sample of 1,896 Italian non-listed firms over the period 2006-2012, totalling 13,074 observations. Methods A significant positive relationship between measures of firm future profitability and discretionary accruals signals efficient earnings management practice (Subramanyam, 1996; Siregar and Utama, 2008). We examine both discretionary accruals (Jones, 1991) and Small Positive Earnings (SPOS) in order to measure discretion in reported earnings (Leuz et al., 2003; Coppens and Peek, 2005). We estimate a simple regression model of the relationship between the dependent variable (non-discretionary net income, net income or operating cash flows one-year-ahead) and the independent variables. Results Our results show that type of earnings management chosen by Italian non-listed firms tends towards opportunistic earnings management, as expected. Further, our results indicate that opportunistic earnings management increase as both firm leverage and size increase. Conclusions In this paper we determine the type of earnings management exhibited by Italian non-listed firms, and in particular whether increased leverage and taxation tend to encourage opportunistic earnings management behaviour. In general, we find a significant negative relationship between discretionary accruals and future profitability, and thus earnings management tends to be opportunistic in Italian firms. We also find that leverage and taxation exhibit little relation with future profitability, again indicating the employment of opportunistic earnings management.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11386/4489458
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