Earnings management to exceed thresholds in continental and Anglo-Saxon accounting models: The British and French cases

Abstract

The purpose of this paper is to compare the extent to which French and British firms manage their earnings in order to avoid losses, decreases in earnings and earnings below the forecasts of analysts. Further, this study aims to investigate the factors that potentially influence earnings management to exceed thresholds with reference to the Anglo-Saxon and continental accounting models. Britain and France, correspondingly, belong to those different socio-economic environments. Based on a panel data of 1771 French and 2057 British firm-year observations during the period 2002–2012, we show that all firms considered manage earnings to beat zero and last year’s earnings. However, earnings management in order to meet analysts’ forecasts appears to be more prevalent in British firms. Considering earnings management incentives, we find that firm size has a positive effect for all thresholds considered. Similarly, the signaling hypothesis is more evident for British firms for all thresholds examined. The corporate governance structure is also found to impact the extent of earnings management.