Earnings management substitution. An analysis of European public and privately held firms
This study examines the trade-off between real and accrual-based earnings management for public and privately held firms. Based on differences in incentives and constraints, I argue that public firms are more likely to substitute real earnings management for accrual-based earnings management than privately held firms. Investor protection is expected to be the moderating factor of this substitution relationship. Using a sample of thirteen European countries, the aggregate results confirm that both types of firms substitute real for accrual-based earnings management, and that publicly held firms are more likely to do so. The results show inconsistencies under different forms of investor protection, which may infer that investor protection is not the discriminating factor when studying earnings management substitution for privately held firms. This is the first study that compares real and accrual-based earnings management among a sample of public and privately held firms. The conclusions and implications can be fruitful for other researchers who wish to study substitution of earnings management methods under the influence of investor protection.
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