African Journal of
Business Management

  • Abbreviation: Afr. J. Bus. Manage.
  • Language: English
  • ISSN: 1993-8233
  • DOI: 10.5897/AJBM
  • Start Year: 2007
  • Published Articles: 4120

Full Length Research Paper

Earnings management techniques in the context of Italian unlisted firms

Gaetano Matonti
  • Gaetano Matonti
  • Business Management, Management and Innovation Systems Department, University of Salerno 132, Giovanni Paolo II Street, 84084 Fisciano (SA), Italy.
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Giuseppe Iuliano
  • Giuseppe Iuliano
  • Business Management, Management and Innovation Systems Department, University of Salerno 132, Giovanni Paolo II Street, 84084 Fisciano (SA), Italy.
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Federica Palazzi
  • Federica Palazzi
  • Department of Economics, Society, Politics, University of Urbino Carlo Bo, Urbino, Italy.
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Jon Tucker
  • Jon Tucker
  • Department of Accounting, Economics and Finance, Faculty of Business and Law, Frenchay Campus, University of the West of England, Bristol, UK.
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  •  Received: 12 January 2021
  •  Accepted: 26 February 2021
  •  Published: 28 February 2021

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.