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Earnings quality under financial crisis: A global empirical investigation

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  • Persakis, Anthony
  • Iatridis, George Emmanuel

Abstract

This study investigates the impact of the Global Financial Crisis of 2008 on earnings quality in publicly listed firms in advanced countries as per level of investor protection. The sample is categorized into three clusters. Cluster 1 is referred as outsider economies with strong outsider protection and legal enforcement and clusters 2 and 3 are referred as insider economies with better and weaker legal enforcement systems respectively. Using linear regression analysis, 137,091 firm-years observations are analyzed and the earnings quality is examined by using conservatism, value relevance, accruals quality, earnings persistence, earnings predictability, loss avoidance analysis and earnings smoothness. The results show that during the financial crisis, earnings quality is decreased. However, this deterioration on earnings quality appears to be more severe in clusters 2 and 3 which are characterized by medium and weak shareholder protection. Particularly, for all clusters, the study shows that in an attempt to cope with recession, managers have an incentive to choose more aggressive conservatism, lower the earnings predictability and book more accruals. Countries in clusters 2 and 3 report more relevant financial numbers and follow artificial smoothing during the financial crisis while the countries in cluster 1 are to some conflicting.

Suggested Citation

  • Persakis, Anthony & Iatridis, George Emmanuel, 2015. "Earnings quality under financial crisis: A global empirical investigation," Journal of Multinational Financial Management, Elsevier, vol. 30(C), pages 1-35.
  • Handle: RePEc:eee:mulfin:v:30:y:2015:i:c:p:1-35
    DOI: 10.1016/j.mulfin.2014.12.002
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    Cited by:

    1. Persakis, Anthony & Iatridis, George Emmanuel, 2017. "The joint effect of investor protection, IFRS and earnings quality on cost of capital: An international study," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 46(C), pages 1-29.
    2. Mao, Yaping & Renneboog, Luc, 2015. "Do managers manipulate earnings prior to management buyouts?," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 43-61.
    3. Persakis, Anthony & Iatridis, George Emmanuel, 2016. "Audit quality, investor protection and earnings management during the financial crisis of 2008: An international perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 73-101.
    4. Mittal, Amit & Garg, Ajay Kumar, 2016. "How do Indian firms cope with a crisis? Earnings management characteristics of CNX Nifty 100 companies," MPRA Paper 85353, University Library of Munich, Germany.
    5. Batten, Jonathan A. & Lucey, Brian M. & Peat, Maurice, 2016. "Gold and silver manipulation: What can be empirically verified?," Economic Modelling, Elsevier, vol. 56(C), pages 168-176.

    More about this item

    Keywords

    Earnings quality; Conservatism; Value relevance; Discretionary accruals; Earnings smoothness;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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