Earnings management to avoid earnings decreases and losses

an exploration across the world





Earnings Management, Small Loss Avoidance, Global Sample


This study evaluates the prevalence of earnings management to avoid losses and earnings decreases across the World. This practice was first documented by Burgstahler and Dichev (1997) for United States firms from 1976 to 1987. We replicate their study for a more recent and global sample. Firms that do not seem to manage earnings do avoid reporting earnings decreases, but we found persistent evidence of earnings management to avoid reporting losses. The results are consistent across different geographical regions, countries, and before and after International Financial Reporting Standards (IFRS) adoption. Unlike Burgstahler and Dichev (1997), however, we were not able to find evidence on which components of earnings (cash flow from operations, changes in working capital, or other accruals) firms mainly manage to increase earnings, concluding they likely use a bundle of all these components. Our results are important mainly to financial analysts and general investors, who should be careful in giving good prospects to firms who presented small profits since they are likely small losses artificially managed to look better, a practice widely spread across time and geographical regions among IFRS adopters and non-adopters.


Ahmed, A., Neel, M., & Wang, D. (2013). Does mandatory adoption of IFRS improve accounting quality? preliminary evidence. Contemporary Accounting Research, 30(4), 1344-1372. DOI: https://doi.org/10.1111/j.1911-3846.2012.01193.x

Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards and accounting quality. Journal of Accounting Research, 46(3), 467-498. DOI: https://doi.org/10.1111/j.1475-679X.2008.00287.x

Beaver, W. H., McNichols, M. F., & Nelson, K. K. (2003). Management of the loss reserve accrual and the distribution of earnings in the property-casualty insurance industry. Journal of Accounting and Economics, 35(3), 347-376. DOI: https://doi.org/10.1016/S0165-4101(03)00037-5

Beyer, A., Guttman, I., & Marinovic, I. (2019). Earnings management and earnings quality: Theory and evidence. The Accounting Review, 94(4), 77-101. DOI: https://doi.org/10.2308/accr-52282

Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24 (1), 99-126. DOI: https://doi.org/10.1016/S0165-4101(97)00017-7

Burgstahler, D. C., & Eames, M. J. (2003). Earnings management to avoid losses and earnings decreases: are analysts fooled? Contemporary Accounting Research, 20(2), 253-294. DOI: https://doi.org/10.1506/BXXP-RGTD-H0PM-9XAL

Christensen, H. B., Hail, L., & Leuz, C. (2013). Mandatory IFRS reporting and changes in enforcement. Journal of Accounting and Economics, 56(2), 147-177. DOI: https://doi.org/10.1016/j.jacceco.2013.10.007

Coase, R. H. (1993). The nature of firms: origins, evolution, and development. Oxford University Press, USA.

Consoni, S., Colauto, R. D., & Lima, G. A. S. F. (2017). A divulgação voluntária e o gerenciamento de resultados contábeis: Evidências no mercado de capitais brasileiro. Revista Contabilidade & Finanças, 28(74), 249-263. DOI: https://doi.org/10.1590/1808-057x201703360

Cunha, P. R., & Piccoli, M. R. (2017). Influência do board interlocking no gerenciamento de resultados. Revista Contabilidade & Finanças, 28(74), 179-196. DOI: https://doi.org/10.1590/1808-057x201701980

Daske, H., Hail, L., Leuz, C., & Verdi, R. (2008). Mandatory IFRS reporting around the world: Early evidence on the economic consequences. Journal of Accounting Research, 46(5), 1085-1142. DOI: https://doi.org/10.1111/j.1475-679X.2008.00306.x

DeAngelo, H., DeAngelo, L., & Skinner, D. J. (1994). Accounting choice in troubled companies. Journal of Accounting and Economics, 17(1-2), 113-143. DOI: https://doi.org/10.1016/0165-4101(94)90007-8

Dechow, P. M., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2-3), 344-401. DOI: https://doi.org/10.1016/j.jacceco.2010.09.001

Dechow, P. M., Richardson, S. A., & Tuna, I. (2003). Why are earnings kinky? An examination of the earnings management explanation. Review of Accounting Studies, 8(2), 355-384. DOI: https://doi.org/10.1023/A:1024481916719

Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 193-225.

Doupnik, T. S. (2008). Influence of culture on earnings management: A note. Abacus, 44(3), 317-340. DOI: https://doi.org/10.1111/j.1467-6281.2008.00265.x

Francis, B., Hasan, I., & Li, L. (2016). A cross-country study of legal-system strength and real earnings management. Journal of Accounting and Public Policy, 35(5), 477-512. DOI: https://doi.org/10.1016/j.jaccpubpol.2016.06.004

Gull, A. A., Nekhili, M., Nagati, H., & Chtioui, T. (2018). Beyond gender diversity: How specific attributes of female directors affect earnings management. The British Accounting Review, 50(3), 255-274. DOI: https://doi.org/10.1016/j.bar.2017.09.001

Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of Accounting and Economics, 7(1-3), 85-107. DOI: https://doi.org/10.1016/0165-4101(85)90029-1

Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting horizons, 13(4), 365-383. DOI: https://doi.org/10.2308/acch.1999.13.4.365

IFRS Foundation. (2018). Who uses IFRS standards? Retrieved from https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/

Holthausen, R. W. (1990). Accounting method choice: opportunistic behavior, efficient contracting, and information perspective. Journal of Accounting and Economics, 12 (1-3), 207-218. DOI: https://doi.org/10.1016/0165-4101(90)90047-8

Jeanjean, T., & Stolowy, H. (2008). Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption. Journal of Accounting and Public Policy, 27(6), 480-494. DOI: https://doi.org/10.1016/j.jaccpubpol.2008.09.008

Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193-228. DOI: https://doi.org/10.2307/2491047

Kerstein, J., & Rai, A. (2007a). Intra-year shifts in the earnings distribution and their implications for earnings management. Journal of Accounting and Economics, 44(3), 399-419. DOI: https://doi.org/10.1016/j.jacceco.2007.04.004

Kerstein, J., & Rai, A. (2007b). Working capital accruals and earnings management. Investment Management & Financial Innovations, 4(2), 33-47.

Kim, J., Kim, Y., & Zhou, J. (2017). Languages and earnings management. Journal of Accounting and Economics, 63(2-3), 288-306. DOI: https://doi.org/10.1016/j.jacceco.2017.04.001

Lee, B. B., Shin, H., Vetter, W., & Kim, D. W. (2017). Management of income statement variables to report small positive earnings numbers. Asian Review of Accounting, 25(1), 58-84. DOI: https://doi.org/10.1108/ARA-09-2015-0091

Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: An international comparison. Journal of Financial Economics, 69(3), 505-527. DOI: https://doi.org/10.1016/S0304-405X(03)00121-1

Li, S. (2010). Does mandatory adoption of International Financial Reporting Standards in the European Union reduce the cost of equity capital? The Accounting Review, 85(2), 607-636. DOI: https://doi.org/10.2308/accr.2010.85.2.607

Lo, K. (2008). Earnings management and earnings quality. Journal of Accounting and Economics, 45(2-3), 350-357. DOI: https://doi.org/10.1016/j.jacceco.2007.08.002

Paulo, E., & Mota, R. H. G. (2019). Ciclos econômicos e estratégias de gerenciamento de resultados contábeis: Um estudo nas companhias abertas brasileiras. Revista Contabilidade & Finanças, 30(80), 216-233. DOI: https://doi.org/10.1590/1808-057x201806870

Phillips, J., Pincus, M., & Rego, S. O. (2003). Earnings management: new evidence based on deferred tax expenses. The Accounting Review, 78(2), 491-521. DOI: https://doi.org/10.2308/accr.2003.78.2.491

Santana, C. V. S., Santos, L. P. G., Carvalho Júnior, C. V. d. O., & Martinez, A. L. (2020). Sentimento do investidor e gerenciamento de resultados no brasil. Revista Contabilidade & Finanças, 31(83), 283-301. DOI: https://doi.org/10.1590/1808-057x201909130

Santos, K. L., Guerra, R. B., Marques, V. A., & Júnior, E. M. (2020). Os principais assuntos de auditoria importam? uma análise de sua associação com o gerenciamento de resultados. Revista de Educação e Pesquisa em Contabilidade (REPeC), 14(1), 56-77. DOI: https://doi.org/10.17524/repec.v14i1.2432

Scott, W. R. (2015). Financial Accounting Theory (7a. ed.). Nova Jersey: Prentice Hall.

Tarca, A. (2012). The case for global accounting standards: Arguments and evidence. Available at SSRN: https://ssrn.com/abstract=2204889. DOI: https://doi.org/10.2139/ssrn.2204889

Watts, R. L., & Zimmerman, J. L. (1986). Positive Accounting Theory. Prentice Hall.



Como Citar

Santana, V. de F., & Sarquis, R. W. (2021). Earnings management to avoid earnings decreases and losses : an exploration across the world. Revista Catarinense Da Ciência Contábil, 20, e3153. https://doi.org/10.16930/2237-766220213153