Earnings Management across the Corporate Life Cycle stages: Does the level of Earnings Management vary depending on the Corporate Life Cycle stages?

Abstract

This study examines if earnings management (as measured by discretionary accruals) vary depending on the life cycle stages firms are in. I propose that the determinants (incentives and influencing factors) will vary over different life cycle stages and therefore that the level of earnings management will vary.

To examine this empirically I use a panel of 391 non-financial listed Swedish firms, with 2836 firm-year observations, over the eight-year period from 2015 to 2022. I estimate the dependent variable using four different discretionary accrual models, these are the Jones Model (Jones, 1991), the Modified Jones model (Dechow, Sloan, & Sweeney, 1995), the Performance Matched model (Kothari, Leone, & Wasley, 2005), and the Cash flow and Accrual reversion model (Pae, 2005). I estimate the independent variable as indicator variables using (Dickinson, 2011) measurement method based on cash flow pattern for the life cycle stages. A fixed effect model with robust standard errors is then employed to estimate the regression.

The findings show a U-shaped pattern in the level of earnings management consistent with my hypotheses. Specifically, the regression results are mixed, with statistically significant results for the introduction and decline stages, but not statistically significant results for the growth and maturity stages.

The results indicate that in the introduction and decline stages managers engage in opportunistic earnings management, and this might convey the higher motivations to secure external financing and avoid financial distress in these stages. The growth and maturity stages show statistically insignificant results, and this indicate that these stages engage in earnings management to a lesser extent among the stages. These stages are characterized by stronger financial performance, a greater ability to self-finance, and lower likelihood of experiencing financial distress. The insignificant result is indicating that these stages don’t significantly manage their earnings.