The effect of discretionary accruals on firm growth. Empirical evidence for SMEs from emerging Europe
Abstract
The aim of the paper is to assess the effect of discretionary accruals on firm growth while controlling for firm characteristics and macroeconomic environment. Employing a large sample of 1.105 young and high-growth firms (gazelles) from 15 emerging European countries over the period 2006–2014, it has been found that the discretionary accruals negatively influence firm growth. The empirical results suggest that discretionary accruals are used as earnings management tools and this practice is more used over the high-growth period (2006–2009), with negative effects on future performance. Furthermore, the results of the quantile regression employed in the whole period suggest that the earnings management practices have a negative effect on firm growth. The results prove to be robust for different estimation approaches and different sub-samples of gazelles. The findings provide empirical evidence for the need for more detailed information provided by firms on the origin of the accruals, as well as for the use in the performance analysis of some indicators that eliminate the influence of accruals, such as cash flow based ratios.
Keyword : firm growth, discretionary accruals, gazelles, emerging Europe, quantile regression, earnings management, private firms, macroeconomic environment
How to Cite
Anton, S. G., & Carp, M. (2020). The effect of discretionary accruals on firm growth. Empirical evidence for SMEs from emerging Europe. Journal of Business Economics and Management, 21(4), 1128-1148. https://doi.org/10.3846/jbem.2020.12734
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Ben Amar, A., Ben Salah, O., & Jarboui, A. (2018). Do discretionary accruals affect firms’ corporate dividend policy? Evidence from France. Journal of Financial Reporting and Accounting, 16(2), 333–347. https://doi.org/10.1108/JFRA-03-2017-0020
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Darmawan, I. P. E., Sutrisno, T., & Mardiati, E. (2019). Accrual earnings management and real earnings management: Increase or destroy firm value? International Journal of Multicultural and Multireligious Understanding, 6(2), 8–19. https://doi.org/10.18415/ijmmu.v6i2.551
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Dechow, P. M., Hutton, A. P., Kim, J. H., & Sloan, R. G. (2012). Detecting earnings management: A new approach. Journal of Accounting Research, 50(2), 275–334. https://doi.org/10.1111/j.1475-679X.2012.00449.x
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Doukakis, L. C. (2014). The effect of mandatory IFRS adoption on real and accrual-based earnings management activities. Journal of Accounting and Public Policy, 33(6), 551–572. https://doi.org/10.1016/j.jaccpubpol.2014.08.006
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Filip, A., Labelle, R., & Rousseau, S. (2015). Legal regime and financial reporting quality. Contemporary Accounting Research, 32(1), 280–307. https://doi.org/10.1111/1911-3846.12071
Fischer, M., & Rosenzweig, K. (1995). Attitudes of students and accounting practitioners concerning the ethical acceptability of earnings management. Journal of Business Ethics, 14(6), 433–444. https://doi.org/10.1007/BF00872085
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Gavious, I., Segev, E., & Yosef, R. (2012). Female directors and earnings management in high-technology firms. Pacific Accounting Review, 24(1), 4–32. https://doi.org/10.1108/01140581211221533
Ge, W., & Kim, J. B. (2014). Real earnings management and the cost of new corporate bonds. Journal of Business Research, 67(4), 641–647. https://doi.org/10.1016/j.jbusres.2013.01.021
Habib, A. (2013). Financial distress, earnings management and market pricing of accruals during the global financial crisis. Managerial Finance, 39(2), 155–180. https://doi.org/10.1108/03074351311294007
Haga, J., Höglund, H., & Sundvik, D. (2018). Stock market listing status and real earnings management. Journal of Accounting and Public Policy, 37(5), 420–435. https://doi.org/10.1016/j.jaccpubpol.2018.09.002
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Heese, J. (2018). The role of overbilling in hospitals’ earnings management decisions. European Accounting Review, 27(5), 875–900. https://doi.org/10.1080/09638180.2017.1383168
Hsiao, C. (2003). Analysis of panel data (2nd ed.). Cambridge University Press. https://doi.org/10.1017/CBO9780511754203
International Monetary Fund. (2020). The financial sector in the 2020s: Building a more inclusive system in the new decade. https://www.imf.org/en/News/Articles/2020/01/17/sp01172019-the-financialsector-in-the-2020s#_edn20
Jenkins, D. S., & Velury, U. K. (2012). Auditor tenure and the pricing of discretionary accruals in the post-SOX era. Accounting and the Public Interest, 12(1), 1–15. https://doi.org/10.2308/apin-10204
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228. https://doi.org/10.2307/2491047
Karampinis, N. I., & Hevas, D. L. (2013). Effects of IFRS adoption on tax-induced incentives for financial earnings management: Evidence from Greece. The International Journal of Accounting, 48(2), 218–247. https://doi.org/10.1016/j.intacc.2013.04.003
Koenker, R., & Bassett, G. (1978). Regression quantiles. Econometrica, 46(1), 33–50. https://doi.org/10.2307/1913643
Koerniadi, H., & Tourani-Rad, A. (2011). The role of accruals as a signal in earnings and dividend announcements: New Zealand evidence. Journal of Applied Accounting Research, 12(2), 108–122. https://doi.org/10.1108/09675421111160682
Krasniqi, B. A., & Desai, S. (2016). Institutional drivers of high-growth firms: country-level evidence from 26 transition countries. Small Business Economics, 47(4), 1075–1094. https://doi.org/10.1007/s11187-016-9736-7
Kuo, J. M., Ning, L., & Song, X. (2014). The real and accrual-based earnings management behaviors: Evidence from the split share structure reform in China. The International Journal of Accounting, 49(1), 101–136. https://doi.org/10.1016/j.intacc.2014.01.001
Lehmann, N. (2016). The role of corporate governance in shaping accruals manipulation prior to acquisitions. Accounting and Business Research, 46(4), 327–364. https://doi.org/10.1080/00014788.2015.1116969
Lo, K., Ramos, F., & Rogo, R. (2017). Earnings management and annual report readability. Journal of Accounting and Economics, 63(1), 1–25. https://doi.org/10.1016/j.jacceco.2016.09.002
Megaravalli, A. V., & Sampagnaro, G. (2018). Predicting the growth of high-growth SMEs: Evidence from family business firms. Journal of Family Business Management, 9(1), 98–109. https://doi.org/10.1108/JFBM-09-2017-0029
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Momente, F., Reggiani, F., & Richardson, S. (2015). Accruals and future performance: Can it be attributed to risk? Review of Accounting Studies, 20(4), 1297–1333. https://doi.org/10.1007/s11142-015-9319-x
Omar, N., Rahman, R. A., Danbatta, B. L., & Sulaiman, S. (2014). Management disclosure and earnings management practices in reducing the implication risk. Procedia – Social and Behavioral Sciences, 145, 88–96. https://doi.org/10.1016/j.sbspro.2014.06.014
Owens, E. L., Wu, J. S., & Zimmerman, J. (2016). Idiosyncratic shocks to firm underlying economics and abnormal accruals. The Accounting Review, 92(2), 183–219. https://doi.org/10.2308/accr-51523
Panda, D. (2015). Growth determinants in small firms: Drawing evidence from the Indian agro-industry. International Journal of Commerce and Management, 25(1), 52–66. https://doi.org/10.1108/IJCoMA-12-2012-0080
Pelucio-Grecco, M. C., Geron, C. M. S., Grecco, G. B., & Lima, J. P. C. (2014). The effect of IFRS on earnings management in Brazilian non-financial public companies. Emerging Markets Review, 21, 42–66. https://doi.org/10.1016/j.ememar.2014.07.001
Perotti, P., & Wagenhofer, A. (2014). Earnings quality measures and excess return. Journal of Business Finance & Accounting, 41(5–6), 545–571. https://doi.org/10.1111/jbfa.12071
Pham, H. Y., Chung, R. Y. M., Roca, E., & Bao, B. H. (2017). Discretionary accruals: signalling or earnings management in Australia? Accounting & Finance, 59(2), 1383–1413. https://doi.org/10.1111/acfi.12275
Rahaman, M. (2011). Access to financing and firm growth. Journal of Banking and Finance, 35(3), 709–723. https://doi.org/10.1016/j.jbankfin.2010.09.005
Robin, A., & Wu, Q. (2015). Firm growth and the pricing of discretionary accruals. Review of Quantitative Finance and Accounting, 45(3), 561–590. https://doi.org/10.1007/s11156-014-0447-3
Rodrigues, R. M. R. C., Melo, C. L. L. D., & Paulo, E. (2019). Earnings management and quarterly discretionary accruals level in the Brazilian stock market. Brazilian Business Review, 16(3), 297–314. https://doi.org/10.15728/bbr.2019.16.3.6
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