The effect of trust on the level of earnings management in European companies

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Journal ISSN
Volume Title
School of Business | Master's thesis
Date
2019
Major/Subject
Mcode
Degree programme
Accounting
Language
en
Pages
46+5
Series
Abstract
Reported earnings are considered to be the most important single item in financial statements reported by publicly held companies. While executives have strong incentives for manage the earnings, International Financial Accounting Standards are being constantly developed in order to make reporting comparable, as well as to control the level of management discretion. This research studies the relationship of trust and earnings management. The objective of this thesis is to find out whether the level of trust in a society affects the level of earnings management in companies. This research uses DeFond & Park model to estimate the level of abnormal working capital accruals that indicate the level of earnings management. Regression analysis is used to find out whether either generalized trust or company trust have an effect on reported abnormal working capital accruals. The sample includes only those European listed IFRS companies operating on other than financial and insurance industry. The sample is also limited to specific European countries. It could be expected, based on the previous researches, that the level of earnings management varies between the societies with different levels of trust. In the regression analysis, generalized trust and company trust are selected to be the hypothesis variables that determine whether the hypothesis is accepted or rejected. However, this research finds that there is no significant correlation between trust and abnormal working capital accruals. Hence, the results suggest that the level of trust does not affect earnings management of European firms.
Description
Thesis advisor
Ojala, Hannu
Keywords
earnings management, trust, IFRS standards, generalized trust, company trust
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