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Über dieses Buch

This book approaches the question of the relation between financial crises and earnings management from two philosophical perspectives: positivism and critical realism. The results obtained using the positivist approach indicate that financial crises tend to have no consistent effect on earnings quality since managers’ earnings behavior does not differ from the pre-crisis to the crisis period. The author accordingly argues against the existence of a causal law based on a constant conjunction model (i.e., whenever a financial crisis happens, earnings management occurs) and concludes that financial crises cannot be seen as the cause of earnings management. The critical realism perspective, on the other hand, casts light on managers’ reasons for acting like an earnings manager; in conjunction with the more traditional positivist approach, it assists in refuting the idea of financial crises as a generative mechanism for earnings management. The author concludes by exploring other structures at work that might be responsible for earnings management. This book will be of interest to both academics and a wide range of professionals.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

This opening chapter presents the research question, gives a brief overview of the book, and pinpoints the main theoretical and practical contributions of the present work. The study examines whether the generative mechanism for managing earnings identified by the previous research (i.e., financial crisis) is adequate. Chapter 2 presents the earnings management phenomenon while Chap. 3 provides a critical realist evaluation of mainstream earnings management literature. Chapter 4 approaches the question of the relationship between financial crisis and earnings management. Finally, Chap. 5 presents both the positivist and the critical realist approach to the research question.

Bruno Maria Franceschetti

Chapter 2. Earnings Management: Origins

This chapter seeks to describe the field of inquiry by defining the concepts of earnings quality, earnings management, fraud, and earnings manipulation. It presents the earnings management phenomenon, specifically, from whence it comes. It reviews the mainstream studies, and focuses on two types of earnings management: accruals earnings management and real activities earnings management. In addition, studies related to fraudulent financial reporting (or non-generally accepted accounting principles, i.e. non-GAAP earnings management) will be presented and discussed as well. Furthermore, this chapter presents studies on managerial incentives for earnings management. The most important incentives (or causes) for managing earnings are discussed and the contradictory results provided by some of them highlighted. Finally, a few offsetting causes that may interfere with these main incentives for managing earnings are presented.

Bruno Maria Franceschetti

Chapter 3. A Critical Realist Perspective on Earnings Management

Prior studies have provided little evidence of earnings management activities although research designs have included the widespread use of strong incentives to manage earnings; i.e., a widespread approach in the earnings management literature is to first identify conditions in which managers’ incentives to manage earnings are likely to be strong, and then test whether patterns of earnings management are observable. Furthermore, the evidence provided by prior studies is often conflicted on what motivates managers to manage earnings. This chapter shifts away from the contradictory conclusions drawn on the causes of earnings management presented by prior positivist research (discussed in Chap. 2). It introduces critical realism as an alternative to the positivist philosophical perspective to investigate the earnings management phenomenon. Finally, it provides a critical realist evaluation of mainstream earnings management literature and related incentives (or identified causes) that have been proposed by prior studies for managing earnings.

Bruno Maria Franceschetti

Chapter 4. Financial Crisis as a Major Cause of Earnings Management: Theoretical Background and Literature Review

This chapter approaches the question of the relationship between financial crisis and earnings management. It presents a review of studies that identified financial crisis as a major cause of earnings management. Previous research on the impact of financial crisis on managers’ earnings management behavior has yielded ambiguous results, depicting different scenarios depending on the choice of firm context/type, and on the start date of the financial crisis. The results show that there is a lack of consensus on the direction and magnitude of earnings management in times of recession. Results of the performed literature review will be operationalized into a hypothesis presented in the following Chap. 5. Therefore, this chapter is essentially propaedeutic to Chap. 5.

Bruno Maria Franceschetti

Chapter 5. Does Financial Crisis Cause Earnings Management?

Previous research on how financial crisis affects managers’ earnings management behavior has resulted in different scenarios with inconclusive results. This Chapter presents both the positivist and the critical realist approach to the research question. To address the ambiguity in the findings in the literature, the present study used a mainstream approach, with the results showing no statistical support for the hypothesis that financial crisis influences earnings management. More specifically, results indicate that managers’ earnings behavior does not differ from the pre-crisis to the crisis periods. Further, it presents critical realism as an alternative to mainstream approach. The study argues against the existence of a causal law based on a constant conjunction model (i.e., whenever a financial crisis happens, earnings management happens) and concludes that financial crisis cannot be seen as the cause of earnings management. Finally, it suggests exploring other structures at work that might be responsible for earnings management.

Bruno Maria Franceschetti
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