Abstract
Earnings management is a legal and widely preferred phenomenon of business finance that financial managers use to maintain and improve the enterprise’s competitiveness. Managers purposely manipulate business earnings to achieve the required status of the enterprise. The consequence of these activities is to provide a positive perspective for the owners, encourage the profitability for the creditor and the investors as well as demonstrate economic strengths to competitors. This article aims to identify parallels and differences in earnings management of enterprises in the Visegrad Four and the Baltics in terms of competitiveness for the nineyear period 2010-2018. The research uses a final sample of 4,543 observations from the EBITs of Slovak, Czech, Hungarian and Polish enterprises as well as 1,633 observations from the EBITs of Latvian, Lithuanian and Estonian enterprises. Time-series methods with all necessary assumptions have been run for the analyzed financial dataset. The results of the econometric modeling of unit roots show significant parallels in these groups of countries. The enterprises from the Visegrad group and the Baltics group use the apparatus of earnings management to be competitive. The obtained results confirm the systematic but legal manipulation from the side of management. A quantitative analysis of homogeneity tests using 1,000,000 Monte Carlo simulations indicates significant time differences of manipulation in these emerging countries. The year 2014 signaled a radical “accelerando” in earnings management for the V4, and the year 2016 is highlighted for the Baltics.
Highlights
Enterprises compete with each other only by the optimization of their own capital structures on the global market (Vagner, 2016)
Based on the observations of 1,089 Slovak enterprises, 722 Czech enterprises, 766 Hungarian enterprises, 1,966 Polish enterprises, 483 Latvian enterprises, 501 Lithuanian enterprises, and 649 Estonian enterprises, the annual average of EBIT is individually computed for the analyzed period (Figure 1)
Our research has aimed to detect the use of earnings management in terms of competitiveness and to identify parallels and differences in earnings management of enterprises in the Visegrad Four and the Baltics
Summary
Enterprises compete with each other only by the optimization of their own capital structures on the global market (Vagner, 2016). Managers of enterprises doing business for more than a decade have a strong motivation to use aggressive behavior against their competitors (Kljucnikov et al, 2016). Financial managers generally prefer aggressiveness and legal earnings manipulation as indicators of sustainable manufacturing in Industry 4.0 (Susanto et al, 2019; Hayhoe et al, 2019). Earnings management has become a very significant and especially trending issue for researchers nowadays. This practice can be considered routine in developed markets. Our research uses a conventional earnings model to quantify the manipulation. We prefer original analysis focusing on the quantitative methods of time series, which is a new methodological approach using stationarity and homogeneity to indicate the manipulation of earnings. The main aim of our study is to identify earnings management strategies as well as parallels and differences in earnings management of enterprises in the Visegrad Four and the Baltics in terms of competitiveness for the nine-year period (2010-2018)
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