Did Firms Manage Earnings More Aggressively during the Financial Crisis?
20 Pages Posted: 3 May 2017
Date Written: May 2, 2017
We investigate the extent of earnings management during the financial crisis of 2008 (The Great Recession). Based on a large sample of over 14,000 observations across 15 years, our results show that firms managed earnings less aggressively during the crisis. We also show a severe decline in firm value and profitability during the crisis. Our results are consistent with the notion that, during the crisis, firm performance was so far below the target that no amount of earnings management would have been sufficient to reverse the poor earnings picture. As a result, managers were less motivated to manage earnings. Furthermore, the crisis serves as a convenient excuse for poor performance, lessening the motivation and necessity for managers to manage earnings. Additional analysis including fixed-effects regressions, propensity score matching, and GMM dynamic panel data estimation, shows that our results are robust and are not driven by unobserved heterogeneity. Further analysis documents similar findings for the Dot-com crisis in 2001 and the Asian Financial Crisis in 1997-1998.
Keywords: Earnings Management, Financial Crisis, Discretionary Current Accruals, Economic Crisis
JEL Classification: G30, M41
Suggested Citation: Suggested Citation