Our research expands the earnings management (EM) literature for Italian unlisted firms by investigating the drivers of both accrual-based (AEM) and real activity-based (REM) earnings management. According to prior literature, the reliability of financial statements of these firms concerns mainly lenders in assessing borrower creditworthiness, and Tax Offices in calculating corporate tax. We analyse non-listed firms as they represent 99.9% of Italian firms, consistent with most European countries. We estimate models using factors drawn from the literature which potentially influence both AEM and REM, along with some robustness tests. For AEM, ownership concentration is a positive driver, consistent with the entrenchment hypothesis, and firm leverage is a positive driver, suggesting the use of debt covenant violation avoidance strategies. Quality auditor engagement tends to constrain AEM, while size has a negative impact. However, tax drives AEM and profitability has a positive impact. For REM, ownership concentration has no impact, and leverage has a positive impact. The engagement of Big 4 constrains REM. Our expectations are confirmed when the total earnings management variable is used as the dependent.
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