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The effect of corruption on the level of real and accrual earnings management in cases of target firms

Apostolos Christopoulos (Department of Business Administration, School of Business, University of the Aegean, Chios, Greece)
Ioannis Dokas (Department of Economics, Democritus University of Thrace, Komotini, Greece)
Christos Leontidis (Department of Economics, Democritus University of Thrace, Komotini, Greece)
Eleftherios Spyromitros (Department of Economics, Democritus University of Thrace, Komotini, Greece)

EuroMed Journal of Business

ISSN: 1450-2194

Article publication date: 13 May 2022

Issue publication date: 23 October 2023

444

Abstract

Purpose

This paper attempts to investigate the effect of corruption on the real and accrual earnings management of target firms in the process of mergers and acquisitions.

Design/methodology/approach

The sample includes target firms from the European area that participate in mergers or acquisitions announced during 2010–2020. The preliminary empirical part estimates the level of earnings management during the period two years before the deal's announcement to identify whether the sample follows the manipulation behavior that the literature suggests for target firms. The primary empirical analysis focuses on the impact of corruption on real and accrual-based earnings management proxies, employing regression models and two alternative proxies for corruption. The existing literature points out that the combination of low levels of corruption and an integrated legal system reduces earnings manipulation.

Findings

The findings provide strong evidence for systematic downwards accounting manipulation practices, whereas the findings for real earnings management are not significant. The findings of the main empirical part show that corruption is positively associated with accrual-based manipulation and negatively related to real earnings management. In essence, in economies with a high level of transparency, managers adopt the manipulation of operating activities as a less detectable practice of earnings management instead of engaging in accounting procedures.

Originality/value

This study contributes to the literature highlighting the diversification of these firms' manipulation strategies according to the national level's corruption status.

Keywords

Acknowledgements

The authors would like to express their appreciation to the editor and the anonymous reviewers for their valuable comments.

Citation

Christopoulos, A., Dokas, I., Leontidis, C. and Spyromitros, E. (2023), "The effect of corruption on the level of real and accrual earnings management in cases of target firms", EuroMed Journal of Business, Vol. 18 No. 4, pp. 575-603. https://doi.org/10.1108/EMJB-03-2022-0055

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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