Methodology and method
To gain an understanding of earnings management, researches use a deductive approach, where they test hypotheses, drawn from theoretical conclusions and by testing these conclusions, scholars can draw its final conclusions (Bryman, 2015). Previous studies on earnings management, such as Ben Amar and Chakroun, (2018), DuCharm, Malatesta and Sefcik, (2001), Riedl, (2004), have tested their theory from a quantitative approach. This study will continue in the footsteps of previous studies and use discretionary accruals to proxy for earnings management in line with Jones (1991), Dechow et al. (1995) and Larcker and Richardson (2004).
Ben Amar and Chakroun (2018) developed a regression model to test if there is a significant correlation between the amounts of CSR reporting and Earnings Management. In their model, they used the Larcker and Richardson (2004) development of the modified Jones Model to proxy for DA. Changing the independent variable, in the Ben Amar and Chakroun’s (2018) model, from indicating CSR reporting to indicate the year previous to the IPO, the year of the IPO or the year after the IPO, the model will enable this study to empirically test the correlation between the IPO year and Earnings Management.
The sample selection starts with a list containing North European IPOs for the years 2005-2017, retrieved from « Börsnoteringar” (2019). The study collects its data from the Amadeus database, containing ten years of financial and business data for European listed companies between the years 2008 and 2017. The list of IPOs contains 1014 IPO events between 2008 and 2017 (« Börsnoteringar », 2019). The study initially excludes 889 companies, as they do not appear in the database. Further, the study excludes 845 firms due to lack of financial data for relevant years. The remaining 44 companies, represented in the database have at least five years of succeeding data, covering at least one of the years adjacent to the IPO. The final total sample consists of 44 companies and 330 firm years.
Earnings management proxy
In previous literature using the Jones models, TA is calculated in two ways. Jones (1991) and Dechow et al. (1995) uses a balance sheet approach to calculate the total value. Larcker and Richardson (2004), on the other hand, uses a cash flow approach where the TA is the difference between operating cash flows and income before extraordinary items. Due to limitations in available data, this study uses the balance sheet approach.
[TA=∆Current Assets-∆Current Liabilities-∆Cash+∆Short time Debt-Depreciation expense] where ∆ is the difference between t and t-1.
This study uses Larcker and Richardson’s (2004) development of the modified Jones model to proxy for Earnings Management. In deviation from Larcker and Richardson (2004) an Ordinary Least Square (OLS) models are used, because both the Houseman test and the Breusch-Pagan LM test results were insignificant. Further, the BM variable is removed as the database lacked the data sufficient to calculate the variable. The model used is the following:
TAit=α+β1(∆Salesit-∆RECit)+β2PPEit+β3CFOit+ε were, TAit is the total accruals for firm i in year t.
∆Salesit is the change in sales for firm i between year t and year t-1.
∆RECit is the change in accounts receivables for firm i between year t and year t-1.
PPEit is the property, plant and equipment for firm i in year t.
CFOit is the current operating cash flow, calculated as the cash flow from operations to net cash flow, for firm i in year t. To provide comparability between companies and firm years, everything is scaled by A, the average total assets between year t and year t-1. The independent variables aim to capture the NA in the firm. ε is the residual and the difference between TA and NA. DA is the difference between TA and NA, leaving ε as a proxy for DA and Earnings Management (Larcker & Richardson, 2004).
The Jones model uses PPE in gross value to proxy for changes in firm conditions (Jones, 1991). Due to limitations in available data, this study uses PPE in net value. Further, this study calculates CFO without change in inventory and tax liability due to limitations in data availability. These deviations from the original models possess a limitation of the calculated DA in this study.
1.1 Background and Problem
2 Frame of reference
2.1 Theoretical background and literature review
2.2 Organizational Façades and Organized Hypocrisy
2.3 Earnings Management
2.4 Hypothesis development
3 Methodology and method
3.3 Earnings management proxy
3.3 Empirical Model
6 Conclusions and Discussion
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Earnings Management; a way to show strength