Business cycles and earnings management strategies: a study in Brazilian public firms<sup>,</sup>

Paulo, Edilson; Mota, Renato Henrique Gurgel

doi:10.1590/1808-057x201806870

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Original Article • Rev. contab. finanç. 30 (80) • May-Aug 2019 • https://doi.org/10.1590/1808-057x201806870 copy

Business cycles and earnings management strategies: a study in Brazilian public firms^* * Paper presented at the XVII International Conference in Accounting, São Paulo, SP, Brazil, July 2017. ^,^ The authors are grateful for the financial support received from the Brazilian National Council for Scientific and Technological Development (CNPq) and for the comments and time dedicated by the ad hoc reviewers, which led to improvements in this study.

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

This study contributes to the literature dealing with the influence of macroeconomic factors on accounting information quality, since it analyzes the earnings management strategies of firms, specifically identifying different discretionary behaviors among economic cycles: 1) different levels of earnings management through accruals between phases of the business cycle, and 2) the trade-off between earnings management through accruals and real earnings management. The results indicate that the accounting information reported should be analyzed with greater caution by its users, especially in periods of great economic oscillations, when managers can increase or reduce opportunistic behavior. The research population comprised non-financial companies with shares traded on the São Paulo Stock, Commodities, and Futures Exchange (BM&FBovespa) and the sample was composed of 247 firms per year, covering the period from 2000 to 2015 and totaling 2,501 observations. The phases of business cycles were used as a proxy for the economic environment and were based on Schumpeter's (1939) study, which divides an business cycle into four distinct phases: expansion, recession, contraction, and recovery. Discretionary accruals were estimated according to the Pae (2005) and Paulo (2007) models. Real earnings management was estimated as described by Roychowdhury (2006), using only the abnormal behavior of production costs and operational decisions. The results of this research show that earnings management strategies, using either accruals or real manipulation, as well as the choice between these strategies, are impacted by the economic environment. The evidence suggests that managers have different opportunistic behavior in each phase of the business cycle. Specifically, they increase the level of discretionary accruals in contractionary phases and reduce it during recoveries, while they manage earnings downwards via real manipulation in recessions and contractions.

Keywords
business cycles; financial crisis; earnings management; accounting information quality

Description	Quantity
Description	Companies	Observations
Number of non-financial firms in the Brazilian stock market	278	4,448
Data missing for the calculation of the variables	20	1,991
Observations considered outliers	11	44
Research sample (companies per year)	247	2,501
Sector
Health	5	61
Oil and Gas	5	50
Technology	5	73
Vehicles and Autoparts	7	76
Travel and Leisure	7	72
Chemical Products	9	100
Building Materials	13	124
Basic Resources	18	221
Real Estate	18	179
Food and Drink	20	153
Retail	23	218
Industrial Products and Services	32	314
Personal and Domestic Products	37	388
Public Utility and Communications	48	472

	n	Mean	Median	Standard deviation	Min.	Max.	Shapiro-Francia
	n	Mean	Median	Standard deviation	Min.	Max.	Coeff.	p-value
Expansion
DAcc_it (Paulo)	643	0.0074	0.0000	0.1334	-0.3157	0.4510	0.9361	0.000
DAcc_it (Pae)	643	0.0092	-0.0007	0.1611	-0.4488	0.5742	0.9141	0.000
Ab_Prod_it	643	-0.0094	0.0017	0.1252	-0.4184	0.3452	0.9654	0.000
Ab_Exp_it	643	0.0014	-0.0205	0.1212	-0.2771	0.4776	0.9131	0.000
REM_it	643	-0.0100	0.0201	0.2222	-0.7841	0.5442	0.9366	0.000
Recession
DAcc_it (Paulo)	301	0.0000	-0.0028	0.1130	-0.3157	0.4510	0.9488	0.000
DAcc_it (Pae)	301	0.0036	0.0075	0.1381	-0.4488	0.5742	0.9056	0.000
Ab_Prod_it	301	0.0008	0.0129	0.1220	-0.4184	0.3452	0.9586	0.000
Ab_Exp_it	301	0.0021	-0.0170	0.1173	-0.2771	0.4776	0.8929	0.000
REM_it	301	-0.0010	0.0312	0.2158	-0.7841	0.5442	0.9165	0.000
Contraction
DAcc_it (Paulo)	1.237	-0.0009	-0.0042	0.1084	-0.3157	0.4510	0.9336	0.000
DAcc_it (Pae)	1.237	-0.0054	-0.0009	0.1299	-0.4488	0.5742	0.9096	0.000
Ab_Prod_it	1.237	0.0039	0.0161	0.1251	-0.4184	0.3452	0.9526	0.000
Ab_Exp_it	1.237	-0.0011	-0.0217	0.1191	-0.2771	0.4776	0.9050	0.000
REM_it	1.237	0.0061	0.0433	0.2223	-0.7841	0.5442	0.9324	0.000
Recovery
DAcc_it (Paulo)	320	-0.0147	-0.0081	0.1016	-0.3157	0.4217	0.9474	0.000
DAcc_it (Pae)	320	-0.0220	-0.0108	0.1221	-0.4488	0.5742	0.9104	0.000
Ab_Prod_it	320	0.0043	0.0127	0.1320	-0.4184	0.3452	0.9562	0.000
Ab_Exp_it	320	-0.0026	-0.0234	0.1277	-0.2771	0.4776	0.9003	0.000
REM_it	320	0.0077	0.0307	0.2344	-0.7841	0.5442	0.9397	0.000

	DAcc_it (Paulo)	DAcc_it (Pae)	Ab_Prod_it	Ab_Exp_it	REM_it	Size_it	ROA_it	Lev_it	IFRS_t	∆%GDP_it	EXP_it	RECES_it	CONT_it	RECOV_it
DAcc_it (Paulo)	1	0.840	0.009	-0.014	0.006	-0.008	0.016	0.029	-0.022	0.048	0.040	0.001	-0.004	-0.048
DAcc_it (Pae)	0.7647	1	-0.112	0.045	-0.091	0.086	0.224	-0.068	-0.022	0.057	0.050	0.017	-0.019	-0.053
Ab_Prod_it	0.0307	-0.0971	1	-0.666	0.912	-0.007	-0.308	0.119	0.080	-0.045	-0.045	0.002	0.029	0.013
Ab_Exp_it	-0.0352	0.0321	-0.6057	1	-0.906	-0.050	-0.045	-0.110	-0.052	0.026	0.008	0.007	-0.007	-0.007
REM_it	0.0318	-0.0766	0.8930	-0.8672	1	0.023	-0.142	0.128	0.073	-0.043	-0.030	-0.004	0.021	0.011
Size_it	0.0013	0.0933	-0.0221	-0.0589	0.0065	1	0.309	0.019	0.173	-0.069	-0.089	0.000	0.067	0.016
ROA_it	-0.0180	0.2007	-0.4128	0.0224	-0.2468	0.1967	1	-0.405	-0.078	0.122	0.046	0.054	-0.086	0.016
Lev_it	0.0468	-0.0420	0.1139	-0.1176	0.1165	0.2435	-0.2553	1	0.049	-0.074	-0.043	-0.026	0.059	-0.008
IFRS_t	-0.0355	-0.0209	0.1083	-0.0782	0.1058	0.1775	-0.1152	0.0650	1	-0.407	-0.595	0.105	0.388	0.096
∆%GDP_it	0.0326	0.0495	-0.0475	0.0218	-0.0420	-0.0456	0.1408	-0.0652	-0.3202	1	0.538	0.390	-0.732	0.012
EXP_it	0.0284	0.0327	-0.0576	0.0213	-0.0466	-0.0913	0.0645	-0.0515	-0.5951	0.5677	1	-0.218	-0.582	-0.225
RECES_it	0.0088	0.0379	-0.0045	0.0143	-0.0090	-0.0002	0.0728	-0.0237	0.1051	0.4915	-0.2176	1	-0.366	-0.142
CONT_it	-0.0068	-0.0174	0.0430	-0.0190	0.0389	0.0682	-0.1071	0.0639	0.3876	-0.8137	-0.5820	-0.3659	1	-0.379
RECOV_it	-0.0357	-0.0536	0.0153	-0.0135	0.0114	0.0176	0.0049	-0.0051	0.0961	-0.0037	-0.2253	-0.1417	-0.3789	1

Phase	Expansion		Recession		Contraction		Recovery
Variables	Coeff.	t	Coeff.	t	Coeff.	t	Coeff.	t
Panel A - Paulo (2007Paulo, E. (2007). Manipulação das informações contábeis: uma análise teórica e empírica sobre os modelos operacionais de detecção de gerenciamento de resultados (Doctoral Thesis). Doutorado em Controladoria e Contabilidade, Contabilidade, Faculdade de Economia, Administração e Contabilidade, Universidade de São Paulo, São Paulo.) Model
Cycle_it	0.005	0.68	0.006	-0.68	0.014^**	2.21	-0.015^***	-2.55
Δ%GDP_it	0.001^**	1.97	0.002^**	2.46	0.003^***	3.55	0.002^**	2.50
Size_it	0.000	0.08	0.001	0.08	0.001	0.14	0.001	0.10
ROA_it	0.051	1.16	0.051	1.14	0.048	1.07	0.050	1.14
Lev_it	0.005	0.16	0.005	0.16	0.004	0.14	0.004	0.15
IFRS_t	-0.006	-0.71	-0.006	-0.86	-0.009	-1.40	-0.007	-0.96
_cons	-0.009	-0.19	-0.008	-0.17	-0.019	-0.41	-0.006	-0.14
R²	0.008		0.008		0.010		0.010
Observations (n)	2,501		2,501		2,501		2,501
Panel B - Pae (2005Pae, J. (2005). Expected accrual models: the impact of operating cash flows and reversals of accruals. Review of Quantitative Finance and Accounting, 24(1), 5-22.) Model
Cycle_it	0.014	1.61	-0.004	-0.45	0.013^*	1.74	-0.023^***	-3.69
Δ%GDP_it	0.001	1.29	0.002^**	2.19	0.003^***	3.00	0.002^**	2.33
Size_it	-0.004	-0.51	-0.003	-0.39	-0.003	-0.37	-0.004	-0.42
ROA_it	0.265^***	4.49	0.261^***	4.43	0.258^***	4.38	0.261^***	4.45
Lev_it	0.017	0.46	0.017	0.45	0.017	0.44	0.017	0.45
IFRS_t	0.007	0.74	0.001	0.18	-0.001	-0.09	0.003	0.32
_cons	0.009	0.15	0.006	0.11	-0.003	-0.06	0.010	0.17
R²	0.043		0.042		0.043		0.045
Observations (n)	2,501		2,501		2,501		2,501

Phase of the cycle	Expansion		Recession		Contraction		Recovery
Model	REM		REM		REM		REM
Variables	Coeff.	t	Coeff.	t	Coeff.	t	Coeff.	t
Cycle_it	0.017	2.73	-0.013^**	-2.04	-0.014^***	-2.88	0.008	1.48
Δ%GDP_it	-0.003^***	-2.77	-0.001	-1.34	-0.003^***	-3.60	-0.002^***	-2.26
Size_it	0.034^***	3.00	0.035^***	3.06	0.036^***	3.18	0.036^***	3.18
ROA_it	0.031	0.48	0.027	0.41	0.026	0.41	0.024	0.37
Lev_it	-0.001	-0.03	-0.002	-0.04	-0.002	-0.04	-0.002	-0.04
IFRS_t	0.022^**	1.96	0.021*	1.57	0.016	1.45	0.013	1.24
_cons	-0.253^***	-3.20	-0.253^***	-3.19	-0.250^***	-3.17	-0.261^***	-3.29
R²	0.062		0.060		0.061		0.060
Observations (n)	2,501		2,501		2,501		2,501

Phase of the cycle		Expansion		Recession		Contraction		Recovery
Model		Mean	Standard deviation	Mean	Standard deviation	Mean	Standard deviation	Mean	Standard deviation
AEM	Paulo	0.0074	0.1334	0.0000	0.1113	-0.0009	0.1084	-0.0147	0.1016
AEM	Pae	0.0092	0.1611	0.0036	0.1381	-0.0054	0.1299	-0.0220	0.1221
REM		-0.0100	0.2222	-0.010	0.2158	0.0061	0.2223	0.0077	0.2344

Phase of the cycle		Expansion		Recession		Contraction		Recovery
Model		Coeff.	t	Coeff.	t	Coeff.	t	Coeff.	t
AEM_it	Paulo	0.005	0.68	0.006	-0.68	0.014^**	2.21	-0.015^***	-2.55
AEM_it	Pae	0.014	1.61	-0.004	-0.45	0.013^*	1.74	-0.023^***	-3.69
REM_it		0.017	2.73	-0.013^**	-2.04	-0.014^***	-2.88	0.008	1.48

Panel A - Paulo (2007Paulo, E. (2007). Manipulação das informações contábeis: uma análise teórica e empírica sobre os modelos operacionais de detecção de gerenciamento de resultados (Doctoral Thesis). Doutorado em Controladoria e Contabilidade, Contabilidade, Faculdade de Economia, Administração e Contabilidade, Universidade de São Paulo, São Paulo.) Model
Phase of the cycle	Expansion		Recession		Contraction		Recovery
Variables	Coeff.	t	Coeff.	t	Coeff.	t	Coeff.	t
Cycle_it	0.006	0.72	-0.006	-0.75	0.014^**	2.22	-0.015^***	-2.51
Unexp_REM_it	-0.054^*	-1.72	-0.054^*	-1.71	0.051^*	-1.63	-0.052^*	-1.65
Δ%GDP_it	0.001^*	1.84	0.002^**	2.40	0.003^***	3.50	0.002^**	2.40
Size_it	0.002	0.30	0.002	0.30	0.002	0.35	0.002	0.32
ROA_it	0.063	1.42	0.062	1.40	0.059	1.32	0.061	1.39
Lev_it	0.001	0.03	0.001	0.03	0.006	0.02	0.009	0.03
IFRS_t	-0.006	-0.73	-0.007	-0.88	-0.010	-1.44	-0.007	-1.01
_cons	-0.018	-0.39	-0.017	-0.37	-0.028	-0.61	-0.016	-0.35
R²	0.011		0.011		0.012		0.013
Observations (n)	2,501		2,501		2,501		2,501
Panel B - Pae (2005Pae, J. (2005). Expected accrual models: the impact of operating cash flows and reversals of accruals. Review of Quantitative Finance and Accounting, 24(1), 5-22.) Model
Cycle_it	0.014	1.67	-0.005	-0.55	0.013^*	1.76	-0.023^***	-3.58
Unexp_REM_it	-0.093^**	-2.40	-0.091^**	-2.35	-0.089^**	-2.29	-0.089^**	-2.29
Δ%GDP_it	0.001	1.06	0.002^**	2.07	0.003^***	2.89	0.002^**	2.14
Size_it	-0.002	-0.20	-0.001	-0.09	-0.001	-0.06	-0.001	-0.11
ROA_it	0.285^***	4.94	0.280^***	4.86	0.277^***	4.80	0.280^***	4.88
Lev_it	0.011	0.30	0.011	0.29	0.010	0.28	0.011	0.29
IFRS_t	0.007	0.66	0.001	0.12	-0.002	-0.19	0.002	0.21
_cons	-0.008	-0.13	0.010	-0.17	-0.020	-0.33	-0.007	0.11
R²	0.049		0.047		0.048		0.051
Observations (n)	2,501		2,501		2,501		2,501

Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade, Departamento de Contabilidade e Atuária Av. Prof. Luciano Gualberto, 908 - prédio 3 - sala 118, 05508 - 010 São Paulo - SP - Brasil, Tel.: (55 11) 2648-6320, Tel.: (55 11) 2648-6321, Fax: (55 11) 3813-0120 - São Paulo - SP - Brazil
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