Transition between firm life cycle stages and earnings management strategies

• Published in: Revista Contabilidade & Finanças 2024-12, Vol.35 (96)
• Main Authors: Ribeiro, João Paulo Machado, Paulo, Edilson, Magro, Cristian Baú Dal
• Format: Article
• Language: English
• Subjects: discretionary accruals; earnings management; earnings quality; firm life cycle
• ISSN: 1519-7077; 1808-057X
• DOI: 10.1590/1808-057x20231954.en

ABSTRACT This study analyzed the effects of firm life cycle stages (LCS) and their changes on the level of adoption of earnings management strategies. Gaps were identified regarding the effects of the transition between various life cycle stages and the propensity for accrual-based earnings management (AEM) and real activities earnings management (REM), as well as the impacts on the trade-off or complementarity relationship between them. The findings reinforce the need for auditors, financial analysts, investors, and regulators to consider company context and specific characteristics, such as firm cycle stage, when analyzing earnings management. The results suggest a greater propensity for all earnings management strategies, in order to hide financial difficulties, at the beginning of the decline stage. A total of 185 companies listed on the Brazilian capital market were analyzed for the period from 2011 to 2022, with data collected from Refinitiv®. Park and Chen’s (2006) model has been adopted to classify firm life cycle stages, and the models were estimated by the system generalized method of moments (system GMM). Growth stage firms use overproduction and avoid discretionary expense cuts as REM strategies. However, when transitioning from the growth stage to the mature stage, they are more likely to cut discretionary expenses as an REM strategy. The use of AEM is more prevalent in the decline stage, when compared to mature stage companies. The findings add evidence to the literature that the trade-off or complementarity relationship between AEM and REM is influenced by firm LCS and their transitions. RESUMO Este estudo analisou os efeitos dos estágios do ciclo de vida (ECV) da firma e suas mudanças no nível de adoção de estratégias de gerenciamento de resultados. Foram identificadas lacunas acerca dos efeitos da transição entre diferentes estágios do ciclo de vida e a propensão ao gerenciamento de resultados por accruals (GRA) e gerenciamento de resultados por decisões operacionais (GRDO), bem como dos reflexos na relação de trade-off ou complementaridade entre elas. Os achados reforçam a necessidade de auditores, analistas financeiros, investidores e reguladores considerarem o contexto e as características específicas das empresas, como o estágio do ciclo da firma, ao analisar o gerenciamento de resultados. Os resultados sugerem uma maior propensão a todas as estratégias de gerenciamento de resultados, a fim de ocultar as dificuldades financeiras, no in