Article2000

Earnings cosmetics in a tax-driven accounting environment: evidence from Finnish public firms

92 citations0/0 files storedEuropean Accounting Review

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Auditing, Earnings Management, Governance Corporate Taxation and Avoidance Corporate Governance and Financial Management

Abstract

Finnish firms are known to manage earnings downwards to avoid income taxes. This study suggests that they simultaneously manage earnings upwards in a smaller scale. The idea behind this behaviour is that humans may perceive a profit of, say, 301 million as abnormally larger than a profit of 298 million. Consequently, firms tend to adjust the second leftmost digit of earnings to exceed nine in order to make the first digit of earnings larger by one. Such corporate behaviour has been previously documented in New Zealand and in the USA. Our study finds a similar phenomenon in Finland. Our results show that although the largest second digits (eight and nine) are fewer than expected, only sixes and sevens are statistically significantly managed upwards.

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References

1985The effect of bonus schemes on accounting decisions 1994Debt covenant violation and manipulation of accruals 2011The effects of bonus schemes on accounting decisions 1998Earnings Management and the Long‐Run Market Performance of Initial Public Offerings 1998Earnings management and the underperformance of seasoned equity offerings11We thank Brad Barber (the referee), Randy Beatty, Vic Bernard, K.C. Chan, Kent Daniel, M. DeFond, Laura Field, David Heike, Chuan Yang Hwang, Jonathan Karpoff, S.P. Kothari, Charles Lee, Wayne Mikkelson (the editor), Tim Opler, Krishna Palepu, K. Ramesh, Jay Ritter, Terry Shevlin, Doug Skinner, Sheridan Titman, Ross Watts, Jerry Zimmerman, and seminar participants at the University of California Finance and Accounting Conference (Davis, March 1995), the NBER Corporate Finance Conference (Boston, August 1995), the Center for Research in Security Prices Seminar (Chicago, October 1995), the American Finance Association Conference (San Francisco, 1996), the American Accounting Association Conference (Chicago, August 1996), the University of Michigan, and the University of Rochester for helpful comments and discussions.1981Smoothing income numbers : objectives, means, and implications 1989Unusual Patterns in Reported Earnings.1996Dividend-based earnings management: Empirical evidence from Finland

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2011Penny Wise, Dollar Foolish: Buy–Sell Imbalances On and Around Round Numbers 2002EARNINGS MANAGEMENT INDUCED BY COGNITIVE REFERENCE POINTS

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