Abstract

Purpose – This study analyzes the relationship between strategic behavior and earnings management in a sample of Eurozone companies between 2009 and 2018. Theoretical framework – The theoretical lens used is the agency theory derived from the managers-owners problem. As support for understanding strategic behavior, we adopted Miles et al. (1978). For earnings information quality, we follow Dechow, Ge, and Schrand (2010). Design/methodology/approach – We opted for a positivist approach and tested our hypotheses on panel data, using regression models and the average test. From Miles et al. (1978), we used the measurement adopted by Bentley, Omer, and Sharp (2013) on public data from Eurozone companies to categorize them in the three typologies of strategic behavior. To estimate earnings management, we adopted the performance-modified Jones model. Findings – There is the suggestion that, in the case of Eurozone companies, business strategy is positively related to earnings management. It was not possible to find statistically significant results of prospectors managing their earnings differently from other companies. We tested the relationships for positive and negative abnormal accruals. We cannot affirm that there is any relationship with the strategy of managing positive earnings. In the case of negative errors, the study suggests that prospectors act to reduce their earnings. Practical & social implications of research – This study contributes to the literature on earnings information quality, especially regarding earnings management. The study both corroborates and departs from the previous literature. It shows the relationship between strategy and earnings management, however, we cannot confirm that prospectors engage in higher levels of earnings management. As practical implications, the evidence that emerged could serve as a contribution to other researchers, regulators, and players in the European financial market. Originality/value – The originality of the research derives from the application of agency theory, earnings quality studies, and business strategy to the European market. Keywords – agency theory; earnings management; strategy behavior.

Highlights

  • From a longitudinal viewpoint, academics offer different types of works that describe how companies compete in their markets

  • In this article we used agency theory (Jensen & Meckling, 1976) as a starting point to investigate the relationship between business strategy and earnings management

  • We adopted the strategy typology of Miles et al (1978) to categorize the strategy adopted by companies operating in the Eurozone

Read more

Summary

Introduction

Academics offer different types of works that describe how companies compete in their markets. Snow, Meyer, and Coleman (1978) describe three reasonably distinct types of competition for companies in their markets. The so-called prospector and defender companies are at the extremes, presenting different behaviors. There are analyzer companies with a moderate degree of mechanization and routine that allow, for example, flexibility for new business activities, constant growth with market penetration, and a focus on product and market development (Higgins, Omer, & Phillips, 2015). Prospectors seek new and innovative products and operate based on a diversified decision-making matrix. Defenders act vertically in an integrated manner, presenting a very narrow product line and a relevant focus on cost reductions (Bentley, Omer, & Sharp, 2013)

Objectives
Results
Conclusion
Full Text
Published version (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