Earnings management in response to the COVID–19 pandemic: Evidence from listed firms in Norway

Abstract

This paper aims to examine the impact of the COVID–19 pandemic on earnings management behavior and earnings quality, in the pre-, during-, and post-COVID periods. Although there is extensive literature on the relationship between crises and earnings management, evidence relating to the COVID-19 pandemic is limited. We employ well-established models that use discretionary accruals as proxies for earnings management. Using a sample of 1,094 firmyear observations of 326 listed firms in Norway from 2017 to 2022, we find that (1) earnings management behavior were intensified during the COVID–19 pandemic resulting in lower earnings quality compared to the pre-COVID period, and (2) evidence of earnings management behavior in the post-COVID period compared to pre-COVID is mixed and inconclusive. However, we find weak evidence of higher earnings quality in the post-COVID period compared to the COVID-19 pandemic period. (3) Income–decreasing activities were more prevalent during the COVID-19 period, which suggests that listed firms in Norway used a big bath strategy to manage earnings.