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Earnings management to avoid losses and earnings decreases in the Italian stock exchange

By M. M. Mattei


Earnings management (EM) occurs when managers opportunistically exercise their discretion over accounting numbers with the intent to obtain a private gain. In the last fifteen years, several studies have investigated the frequency and the magnitude of EM, as well as reasons for which earnings are managed. The conceptual framework of the vast majority of EM studies is that the firm is a “nexus of contracting relationships” and that the model “principal-agent” can be used to explain the interactions between the stakeholders, especially managers and shareholders. The Italian literature, on the other hand, does not tend to emphasize the unrest within the firm. Furthermore, the Italian Stock Exchange has a relatively small number of listed companies and the firms’ ownership structure is very concentrated. The purpose of this paper is to verify whether Italian listed companies engage in EM in order not to report a loss or an earnings decrease, and whether the ownership structure is a relevant explanatory variable. We found evidence that managers tend to avoid losses, whereas it doesn’t seem they manage earnings to avoid earnings decreases. The ownership structure appears to be relevant, but the results are not completely compelling. Specifically, according to the hypotheses formulated, if the largest shareholder of a firm is a family, its managers are less likely to manage earnings to avoid losses. But, in contrast with the expected result, there is not a significant association between the share of the largest shareholder of a firm and the likelihood that its managers manage earnings to avoid losses

Publisher: Giuffrè Editore
Year: 2007
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