Three Essays on Earnings Management: Evidence from the UK

UoM administered thesis: Phd

  • Authors:
  • Kostas Pappas


In this thesis, I examine earnings management issues in the UK context. The thesis consists of three essays.The first chapter investigates whether managers base their trade-off decisions among real earnings management, accruals-based earnings management, and classification shifting, on the costs, constraints and timing of each strategy in the UK. The empirical evidence suggests that some, but not all, costs and constraints play a role in managers' trade-off decisions. Further, contrasting between firms that are most likely to have manipulated earnings and firms that are not likely to have manipulated earnings, I find no difference in the relation of constraints towards all earnings management forms. This indicates that cost and constraints do not capture entirely what they are designed to, in the first place. Finally, I document evidence that is consistent with managers using real and accruals-based earnings management as substitutes but fail to find evidence that classification shifting acts as a substitute.The second essay studies the effect of income smoothing via accruals-based and real earnings management on the relationship between current stock returns, current earnings and future earnings. I measure income smoothing as the contemporaneous correlation between changes in earnings management proxies and pre-managed income. Using a sample of non-financial publicly listed firms in the UK, I show that both accruals-based and real income smoothing measures are associated with significantly positive share price anticipation of earnings. These results are robust to different stock returns specifications, income smoothing measure calculations, abnormal accruals models and accumulation periods of stock returns.In the third and final essay, I investigate the impact of the level of accruals-based and real earnings management on measures of the amount of performance commentary in annual reports for a large sample of UK public firms. I use automated textual analysis to construct disclosure scores based on the amount of performance and causal commentary. The results suggest that firms with higher levels of earnings management have lower levels of disclosure of performance and causal commentary. The presence of bad news for the firm (missed analyst forecast, underperformance or earnings decline) affects the relationship between disclosure and accruals-based earnings management but not the relationship between disclosure and real earnings management.


Original languageEnglish
Awarding Institution
Award date1 Aug 2016