Abstract
The research expands the earnings management (EM) literature for Italian unlisted firms by investigating the drivers of both accrual-based (AEM) and real activity-based (REM) earnings management. According to prior literature, the reliability of financial statements of these firms concerns mainly lenders in assessing borrower creditworthiness, and Tax Offices in calculating corporate tax. We analyse unlisted firms as they represent 99.9% of Italian firms, consistent with most European countries. We estimate models using factors drawn from the literature which potentially influences both AEM and REM, along with some robustness tests. For AEM, ownership concentration is a positive driver, consistent with the entrenchment hypothesis, and firm leverage is a positive driver, suggesting the use of debt covenant violation avoidance strategies. Quality auditor engagement tends to constrain AEM, while size has a negative impact. However, tax drives AEM and profitability has a positive impact. For REM, ownership concentration has no impact, and leverage has a positive impact. The engagement of Big 4 constrains REM. Our expectations are confirmed when the total earnings management variable is used as the dependent. Key words: Earnings management, accrual-based earnings management, real activity-based earnings management, determinants, unlisted firms, Italy.
Highlights
Leuz et al (2003) find for a sample of listed firms from 31 countries that Italy ranks highly in terms of engagement in earnings management activity
Hoang and Phung (2019) find a positive relationship between real activitybased earnings management (REM) and leverage in a sample of Vietnamese listed firms. They explain that REM is harder to detect than accrualbased earnings management (AEM) and managers of indebted firms, under the scrutiny of lenders, receive net benefits when engaging in REM
We set out to study the firm level determinants of accrual-based and real activity-based EM for a large sample of Italian unlisted firms over the years 2011-2018 in order to analyze which are incentives to management to engage in AEM and/or REM earnings management techniques
Summary
Leuz et al (2003) find for a sample of listed firms from 31 countries that Italy ranks highly (fifth) in terms of engagement in earnings management activity. Analysing a sample of Italian unlisted firms, Poli (2013a, b; 2015), including the earnings distribution, finds that such firms smooth their earnings for the purposes of loan covenants and tax reduction. The findings are consistent with the wider existing literature (Ball and Shivakumar, 2005; Burgstahler et al, 2006).
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
