Accrual-Based Earnings Management and the COVID-19 Pandemic

• Published in: The journal of applied business and economics 2023-11, Vol.25 (5), p.61-71
• Main Authors: Hsu, Pei-Hui, Jan, Ching-Lih
• Format: Article
• Language: English
• Subjects: Accrual basis accounting; Accruals; Book value; Capital expenditures; Cash flow forecasting; Cash flow statements; COVID-19; Earnings management; Economic recovery; Financial accounting standards; Financial reporting; Financial statements; Intangible assets; Literature reviews; Pandemics; Profits; Regression analysis; Return on assets; Stock prices
• ISSN: 1499-691X
• DOI: 10.33423/jabe.v25i5.6512

In this study, we document the accrual-based earnings management of Old Economy firms and New Economy firms (firms in the technology industry) and loss-making firms (firms with negative earnings in the pre-pandemic year, 2019) and profit firms in each economy, respectively, before, during, and in the recovery year of the COVID-19 pandemic. Using both univariate and difference-in-difference regression analyses, we find that old and new economy firms adopt different accrual-based earnings management, and Old Economy Loss firms changed their accrual-based earnings management the most during and in the recovery of the pandemic. During the 2020 pandemic, Old Economy Loss reported the lowest amount of accrual-based discretionary accruals. This suggests that Old Economy Loss firms are engaged in the most conservative approach to reporting their earnings, consistent with the big bath proposition. In the recovery year of the pandemic, 2021, we find that accrual-based earnings management reversed, with the old economy losing firms reporting the highest amounts of discretionary accruals. However, we do not find that the explanatory power of earnings on the variance of stock prices for the old economy loss firms is affected by their discretionary change in accounting accruals.