Do Life-Cycles Affect Financial Reporting Quality? Evidence from Emerging Market

Abstract

This paper aims to present the effect of life cycle on financial reporting quality (FRQ). Discretionary accruals, small profit, and audit aggressiveness were used to test the FRQ from different approaches for Borsa Istanbul-listed companies between 2008 and 2017. The sample comprises 1,645 observations of 217 companies over a 9 year period. The life stages were estimated with Dickinson's cash-flow patterns. Following Hansen, Hong and Park, introduction, growth, mature, shake-out, and decline parameters were assigned values of 0, 0.25, 0.5, 0.75, and 1, respectively. The findings for small profit and discretionary accruals are consistent with those of previous literature. Results show that both discretionary accruals and small profit decrease as the companies move forward in their life cycles, while, on the other hand, audit aggressiveness increases. A negative coefficient was observed, but it was insignificant for the other dependent variables. The findings provide insight into the effect of life-cycle stages on FRQ. Results show that the introduction and decline stages negatively affect FRQ, and in addition showed that the audit aggressiveness of Turkish companies decreases with increased listing duration.

Does the life cycle affect earnings management and bankruptcy?

“…Start-ups and declining companies evidence strong upward earnings manipulation (mean value of discretionary accruals deflated by previous total assets are approx. 0.025) as these companies achieve only negative cash flow, which is in accordance with Can (2020). Regarding this, Park and Chen (2006) notes that failing companies apply a less conservative accounting policy, which increases value for investors.…”

The Relationship between Earnings Benchmarks and Earnings Management across the Stages of a Listed Egyptian Firm’s Life Cycle

“…This suggests that managers of such firms prefer to use REM tools opportunistically to reflect a good financial position to their stakeholders and, at the same time, conceal the poor indications of earnings that such firms may suffer in the decline stage (Krishnan et al, 2018;Hussain et al, 2020). In addition, mangers of such firms may have the incentive to perform REM to avoid violations of debt covenants and to report good business performance which their firms are unable to achieve at this stage (Sweeney, 1994;Defond and Jiambalvo, 1994;Chen et al, 2010) This result is consistence with the findings of Hastuti et al (2017), Can (2020) and Hussain et al (2020).…”

“…Accordingly, there is no need for such firms' managers to use earnings management tools (Bulan and Yan, 2010;Hasan et al, 2017;Hussain et al, 2020). Hastuti et al, 2017;Hussain et al, 2020;Can, 2020) perform REM rather than AER. Table 6 shows that there is a positive and significant (p < 0.01) association between REM and such firms.…”

When Does Earnings Management Matter? Evidence across the Corporate Life Cycle for Non-Financial Chinese Listed Companies

“…Moreover, young firms grow rapidly which makes it difficult to ensure high financial reporting quality (Doyle et al 2007). The introductory stage also negatively affects the firm reporting quality (Can 2020). Idiosyncratic volatility and uncertainty about cash-flows is also much higher for the new start-ups (Habib and Hasan 2017;Irvine and Pontiff 2009).…”