This study uses the performance of the discretionary estimation models by using a sample of listed companies in the Netherlands and Germany. The actual accounting framework provides a wide opportunity for managers to influence data in financial reporting. The corporate reporting strategy, the way managers use their discretionary accounting, has a significant effect on the company's financial reporting. The authors contribute to the literature through enhancement to these models to accomplish better effects of identifying earnings management as well as to present evidence that is particular to the Dutch and German setting.
For this, we followed the methodology of Dechow, Sloan, and Sweeney (1995) and Chan et al. (2006) and test which model can detect Dutch and German firm’s earnings management better by applying those models to the artificially manipulated earnings after adding some amount to the reported earnings.
This investigation found that earnings are managed relatively more in Germany than in the Netherlands. The relationship between earnings management, stock returns, and corporate governance has been tested. Our results suggested that the strong or weak impact of corporate governance in these two countries varied. The multi-sectoral Jones model has a modest illustrative capacity.
Finally, the results show that maximum discretionary accruals involve a large number of estimated errors which have foreseeable effect on income, stock returns and future cash flows. The decrease in level of earnings management indicates that the measurement error has been largely eliminated in the estimated performance -related accruals.
Globalization and technological developments are very positive developments, but increasingly their negative consequences become more severe, especially for lower educated groups in society. Also the major changes in educational levels of employed people have a similar impact. This article shows a number of long term developments for the Netherlands, showing that until the 1980s the many changes could be handled more or less adequately to keep the society inclusive, but that thereafter the social divisions have increased considerably. The recent rise in social discontent, in populism, can be connected to this rising inequality. This pattern is not typical Dutch, it seems relevant for most develoed economies.
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