Earnings management tools during financial difficulties: evidence from French unlisted companies

The aim of this paper is to investigate whether there is a relationship between the severity of financial difficulties of active firms (i.e., not involved in any insolvency procedure) and their level of earnings management, and how companies manipulate earnings during these situations. The evidence from a sample of French non-financial unlisted entities, composed of 6,190 different firms and 47,660 observations, with data from 2009 to 2016 subjected to multivariate analyses, reveals that firms with more severe financial problems exhibit higher levels of income-increasing earnings manipulation. It also indicates that, in situations of financial difficulties, entities manage earnings through real activities rather than accruals. All this evidence holds true for different proxies for financial concerns and earnings management, as well as after controlling for the impact of the financial crisis. The results highlight to auditors and other monitoring bodies the areas of an annual report that may indicate earnings manipulation during situations of financial difficulties. They contribute to the debate about the joint and/or alternative use of accrual-based and real transaction manipulation, showing that, during situations involving financial problems, companies use them as alternatives. They finally add to the research about the role of institutional settings and/or firm incentives in the choice between different earnings management tools.