Firm life cycle stages and earnings management

We provide evidence that the differences in economic growth and stability of firms during different stages of their life cycle encourage managers to manage the reported earnings differently to achieve their goals. Our findings support the expectation that managers adjust the reported earnings upward using positive discretionary accruals during the introductory and decline stages of firm life cycle. The upward adjustment of reported earnings during the introductory stage enables them to achieve the objective of sending positive signals on firm performance when the firm is in a formative stage, and also provides a better base for prediction of future earnings. The upward adjustment of reported earnings during the decline stage are expected to enhance firm’s life, which would enable managers to take remedial actions to improve firm performance, especially when the firm is in a distress situation. On the other hand, our findings show that managers may consider using negative discretionary accruals during the growth and maturity stages so that they can save some earnings for use during later years when firm performance compared to market expectations is weak. The managers are, however, not likely to adjust the reported earnings downward when the reported earnings fall short of market expectations. Additionally, we find that large institutional shareholdings perform effective monitoring and discourage managers to use discretionary accruals because their use may result in lower reliability of reported earnings.