Do Creditors Prefer Smooth Earnings? Evidence from European Private Firms

49 Pages Posted: 16 Sep 2014 Last revised: 31 Mar 2015

See all articles by Joachim Gassen

Joachim Gassen

Humboldt University of Berlin - School of Business and Economics; Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Rolf Uwe Fuelbier

University of Bayreuth

Date Written: February 20, 2015

Abstract

We investigate the interplay between creditor financing and the smoothness of earnings reported by European private firms and document how heterogeneous debt-contracting infrastructures across Europe moderate this relation. Most European private firms are owner-manager run enterprises with private creditors as central outside stakeholders. In this setting we expect the smoothness of earnings to be positively related to the relative importance of these stakeholders. More importantly, we expect this relation to be more pronounced in regimes with higher bankruptcy and contract enforcement costs. Finally, we hypothesize that earnings smoothness is negatively related to the cost of debt of firms in these countries. Our large-sample empirical evidence confirms our expectations. While the cross-sectional nature of our setting limits our potential to address endogeneity concerns and thus caution is required when interpreting our findings in a causal way, they are consistent with the accounting of European private firms being shaped by creditor incentives and with this link being moderated by the country-level efficiency of the debt-contracting infrastructure.

Keywords: earnings smoothness, private firms, creditors

JEL Classification: M41, G32

Suggested Citation

Gassen, Joachim and Fuelbier, Rolf Uwe, Do Creditors Prefer Smooth Earnings? Evidence from European Private Firms (February 20, 2015). Journal of Intrernational Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2496791 or http://dx.doi.org/10.2139/ssrn.2496791

Joachim Gassen (Contact Author)

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany
+49 30 2093 5764 (Phone)
+49 30 2093 5670 (Fax)

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE) ( email )

Spandauer Strasse 1
Berlin, D-10178
Germany

Rolf Uwe Fuelbier

University of Bayreuth ( email )

Universit├Ątsstra├če 30
Bayreuth, 95447
Germany
+49(0)921 554820 (Phone)
+49(0)921 554822 (Fax)

HOME PAGE: http://www.irl.uni-bayreuth.de

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