Abstract
The aim of the paper is to assess the effect of discretionary accruals on firm growth while controlling for firm characteristics and macroeconomic environment. Employing a large sample of 1.105 young and high-growth firms (gazelles) from 15 emerging European countries over the period 2006–2014, it has been found that the discretionary accruals negatively influence firm growth. The empirical results suggest that discretionary accruals are used as earnings management tools and this practice is more used over the high-growth period (2006–2009), with negative effects on future performance. Furthermore, the results of the quantile regression employed in the whole period suggest that the earnings management practices have a negative effect on firm growth. The results prove to be robust for different estimation approaches and different sub-samples of gazelles. The findings provide empirical evidence for the need for more detailed information provided by firms on the origin of the accruals, as well as for the use in the performance analysis of some indicators that eliminate the influence of accruals, such as cash flow based ratios.
Highlights
The quality of financial information reported by firms and their influence on the decisions of different users are widely discussed in the literature
They can use innovative marketing strategies or measures to improve the efficiency of their activity, as well as earnings management actions, precisely to overcome this stage of their own evolution, or to show increased performance, respectively, a better image that will facilitate their access to finance (Chen et al, 2011; Campa, 2015) or even increasing market share
The qualitative level of financial information reported by firms can influence their growth, both directly through the effect on the decisions of different users and indirectly through the interpretation of some indicators developed on inaccurate or less relevant data
Summary
The quality of financial information reported by firms and their influence on the decisions of different users are widely discussed in the literature. As the problems of information asymmetry and agency costs are more pronounced in the case of young and high-growth firms, managers are more likely to use indirect mechanisms (such as accruals) rather than direct mechanisms (press releases and conference calls) in signaling future favorable performance (Robin & Wu, 2015). These samples of firms allow us to study the impact of discretionary accruals over the period of high-growth and after the high-growth period.
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