Does financial crisis impact earnings management? Evidence from Turkey

• Author: Nida Türegün
• Date: 01 January 2020
• DOI: http://doi.org/10.1002/jcaf.22418
• Published date: 01 January 2020

BLIND PEER REVIEW

Does financial crisis impact earnings management?

Evidence from Turkey

Nida Türegün

Ozyegin University, School of Applied

Sciences, Istanbul, Turkey

Correspondence

Nida Türegün, Ozyegin University,

Cekmekoy Kampüsü, Nisantepe Mah.,

Orman Sok., 34794 Istanbul, Turkey.

Email: nida.turegun@ozyegin.edu.tr

Abstract

This study attempts to display the impact of global financial crisis of 2008 on

earnings management (EM) compare with the period before and after with the case

of listed manufacturing firms in Borsa Istanbul for the period of 2007–2012.

Furthermore, it deepens the EM literature by concentrating on an emerging econ-

omy. Discretionary accruals (DA) were computed using the modified Jones model

as a measure of EM. Moreover, this study examines EM behavior by separating

firms into firms with positive and negative DA. The results of this study registered

a high level of EM in firms throughout the postcrisis period.

KEYWORDS

accounting quality, Borsa Istanbul, earnings management, financial crisis, investor protection

JEL CLASSIFICATION

M41; M49

1|INTRODUCTION

The managers within organizations often indulge in account

manipulation as well as earnings management (EM) to meet

stakeholders' expectations, which results in financial reporting

that may not accuratelypresent the firms' operations. Financial

reporting quality has drawn enormous notice throughout the

years, particularly after the discovery of a set of accounting

scandals such as the Enron,Tyco, and Lehman Brothers cases

(Kumar & Vij, 2017). The accuracy in financial reporting is

vital for internal and external users of financial information,

especially for investors for it assists in the decision-making

process (Bhattacharya, Desai, & Venkataraman, 2013).

Transparency in financial reporting facilitates evaluation

of the financial condition of an entity for the investors, credi-

tors, and other market participants. Along with better decision

making, transparency also increases the confidence of the

investors concerning the fairness of the markets (Fung, 2014).

Introducing window dressed accounting images increases

information asymmetry, which regulates the functioning of

financial markets which acts as a major motivation for the

managers to indulge into such practices. However, there are

various situations where the users can be influenced in one

way or another by presenting distorted information, and thus,

their behavior can easily be manipulated. Despite the raft of

corporate governance, and various reforms being introduced

in financial disclosure practices, corporate accounting still

continues to be murky, and companies still have various ways

of playing hide-and-seek with the system (Bhasin, 2016).

The financial crisis and latest accounting scams related

with faulty transactions have led to a diminution in the

trust of investors, adversely affecting the listed financial

firms (Bartram & Bodnar, 2009). EM may be expressed as

“purposeful intervention in the external financial reporting

process with the intent to obtaining one private gain”(Schipper,

1989). It transpires when manipulations in financial statements

are done within the gap in the law and might deceive several

shareholders (Wu, 2014).

The investors' confidence typically lowers throughout the

financial crisis periods as it is believed that the managers may

manipulate the accuracy of the financial information by prac-

ticing EM (Gorgan, Gorgan, Dumitru, & Pitulice, 2012). EM

has been a subject area which has been receiving sufficient

attention of numerous researchers in the last two decades

Received: 9 August 2019 Accepted: 16 September 2019

DOI: 10.1002/jcaf.22418

64 © 2019 Wiley Periodicals, Inc. J Corp Acct Fin. 2020;31:64–71.wileyonlinelibrary.com/journal/jcaf