The impact of regulatory flexibility related to financial reporting on earnings management

Abstract

The goal of the paper is to research and evidence the effect of regulatory flexibility in terms of financial reporting deadlines on earnings management proxies within European companies between 2019 and 2021. Using panel data from 100 sampled listed firms from 10 EU countries between 2017 and 2021, pooled OLS regressions examined whether the timeliness and adjustment from 2019 have any impact on results in 2021 and earnings management activities. Empirical results support hypothesis, that firms listed in countries with regulatory flexibility on financial reporting deadline, used significantly more income decreasing accruals in their reported results in 2019. On 10% significance level, it also observed that Insurance firms tend to use more discretionary accruals in 2019 and 2021. Results also suggest, timeliness of the financial reporting (delay) has a statistically significant negative effect on the total amount of discretionary accruals in 2021. As opposed to the earnings management activities (adjustment in absolute terms), which has a statistically significant positive effect on the discretionary accruals in 2021 from 2019, meaning the more observed firms adjusted their earning in 2019, the more signifcantly they did in 2021 (in absolute terms).