Real Earnings Management in UK Private and Public Firms

Abstract

This paper analyses real earnings management among private versus public firms. Using accounting data of British firms, we find that public firms overall engage in more earnings management through real operating activities. Furthermore, when clear incentives to manage earnings in a specific direction are present, such as to beat earnings targets, we also find that public firms manage their earnings in the expected direction more than private firms. Additional tests reveal that higher analyst coverage may mitigate the level of abnormal operating behaviour in certain settings while quality auditing is not a limiting factor. We also find that high managerial ownership among private firms is associated with less real earnings management. Our study contributes to the emerging literature on non-accrual earnings management and to the broader understanding about the private vis-a-vis public firm reporting and operating behaviour.