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Earnings management as a predictor of future profitability of Finnish firms

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  • Juha-Pekka Kallunki
  • Minna Martikainen

Abstract

This study investigates whether the level of current earnings management can be used to predict future profitability of Finnish firms. Earnings management is assumed to predict future profitability, because firms use discretional accruals to manage this year's earnings upwards/downwards, if they believe that the next year's earnings will be high/low. Finnish data are used because the extent of the earnings management can be directly measured from the published Finnish financial statements. The results indicate that the lagged earnings management is significantly related to the future profitability of a firm. The lagged earnings management also contains incremental information relative to past profitability or stock prices when predicting future profitability.

Suggested Citation

  • Juha-Pekka Kallunki & Minna Martikainen, 2003. "Earnings management as a predictor of future profitability of Finnish firms," European Accounting Review, Taylor & Francis Journals, vol. 12(2), pages 311-325.
  • Handle: RePEc:taf:euract:v:12:y:2003:i:2:p:311-325
    DOI: 10.1080/0963818032000089409
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 2000. "Forecasting Profitability and Earnings," The Journal of Business, University of Chicago Press, vol. 73(2), pages 161-175, April.
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    7. Kallunki, Juha-Pekka & Martikainen, Minna & Martikainen, Teppo, 1998. "Accounting income, income components and market-to-book equity ratios: Finnish evidence," The International Journal of Accounting, Elsevier, vol. 33(3), pages 359-375.
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    Cited by:

    1. Pawan Madhogarhia & Ninon Sutton & Theodor Kohers, 2009. "Earnings management practices among growth and value firms," Applied Financial Economics, Taylor & Francis Journals, vol. 19(22), pages 1767-1778.
    2. Boachie, Christopher & Mensah, Emmanuel, 2022. "The effect of earnings management on firm performance: The moderating role of corporate governance quality," International Review of Financial Analysis, Elsevier, vol. 83(C).
    3. Annukka Jokipii & Sami Vähämaa, 2006. "The Free Cash Flow Anomaly Revisited: Finnish Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(7‐8), pages 961-978, September.
    4. Cynthia P. Cudia & Aeson L. Dela Cruz & Madeleine B. Estabillo, 2021. "Effect of Firm Characteristics and Corporate Governance Practices on Earnings Management: Evidence from Publicly Listed Property Sector Firms in the Philippines," Vision, , vol. 25(1), pages 77-87, March.

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