Parents Use of Subsidiaries to 'Push Down' Earnings Management: Evidence from Italy

50 Pages Posted: 8 May 2013 Last revised: 15 Jul 2017

See all articles by Massimiliano Bonacchi

Massimiliano Bonacchi

Free University of Bolzano - Faculty of Economics and Management; New York University (NYU) - Department of Accounting

Fabrizio Cipollini

Universita di Firenze, DiSIA (Dipartimento di Statistica, Informatica, Applicazioni)

Paul Zarowin

New York University (NYU) - Department of Accounting

Date Written: June 1, 2017

Abstract

We find evidence consistent with Italian non-listed subsidiaries engaging in accrual and real earnings management, so that their listed parents can meet or beat benchmarks. Thus, the parent firm drives the earnings management of the subsidiaries.We identify parents that are more likely to have managed earnings as the ones that avoid a small loss or meet or beat analyst forecast by a few cents. Cross-sectional analysis reveals that Big 4 auditors mitigate accrual earnings management at the subsidiary level and that family-owned firms use earnings management through non-listed subsidiaries mainly to avoid reporting losses. Finally, we find that parent firms communicate earnings management strategies to their subsidiaries using board proximity. Our evidence shows that business groups manage earnings differently from single firms, pushing earnings management down to subsidiaries. It also supports the monitoring role of Big 4 auditors in a business group setting and contributes to understanding financial reporting decisions in family-owned firms.

Keywords: Earnings management, Private subsidiaries, Consolidation process, Accounting accruals, Real activities

JEL Classification: M4, M41

Suggested Citation

Bonacchi, Massimiliano and Cipollini, Fabrizio and Zarowin, Paul, Parents Use of Subsidiaries to 'Push Down' Earnings Management: Evidence from Italy (June 1, 2017). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2262042 or http://dx.doi.org/10.2139/ssrn.2262042

Massimiliano Bonacchi (Contact Author)

Free University of Bolzano - Faculty of Economics and Management ( email )

Universitätsplatz, 1
Bozen-Bolzano, BZ 39100
Italy
+39 0471 013290 (Phone)

HOME PAGE: http://www.unibz.it/en/economics/people/StaffDetails.html?personid=35968&hstf=35968

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://www.stern.nyu.edu/faculty/bio/massimiliano-bonacchi

Fabrizio Cipollini

Universita di Firenze, DiSIA (Dipartimento di Statistica, Informatica, Applicazioni) ( email )

Viale Morgagni, 59
Florence, Florence 50134
Italy
+39 055 2751592 (Phone)
+39 055 4223560 (Fax)

Paul Zarowin

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
422 Tisch Hall
New York, NY 10012-1118
United States
212-998-0015 (Phone)
212-995-4004 (Fax)

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