Earnings quality under financial crisis: A global empirical investigation

Abstract

This PhD paper investigates a) the impact of the financial crisis of 2008 on earnings quality, b) the joint effect of financial crisis of 2008 and investor protection on audit quality, c) the joint effect of audit quality and investor protection on earnings quality and d) the cost of capital and the changes of audit quality and earnings quality influencing on it due to financial crisis of 2008 in publicly listed firms in advanced countries as per level of investor protection. The sample is categorized into three clusters. Cluster 1 is referred as outsider economies with strong outsider protection and legal enforcement and clusters 2 and 3 are referred as insider economies with better and weaker legal enforcement systems respectively. Using linear regression analysis, 137.091 firm-years observations are analyzed, the earnings quality is examined by using 10 different measures (conservatism, value relevance, accruals quality, earnings persistence, earnings predictability, loss avoidance analysis and earnings smoothness), the audit quality is examined by using 6 different measures (audit fees, modified audit report opinion, auditor switch, status of audit firm, existence of audit committee and demand for auditing), the investor protection is examined by using 8 different metrics adopted from World Economic Forum (property rights, judicial independence, transparency of government policymaking, strength of auditing and reporting standards, efficacy of corporate boards, protection of minority shareholders' interests, strength of investor protection and legal rights index), and the cost of equity capital under constant growth model introduced by Palea (2007) and under PEG ratio method introduced by Easton (2004) is examined.The results are mixed among clusters and research periods. Specifically, first, the results show that during the financial crisis, earnings quality is decreased. However, this deterioration on earnings quality appears to be more severe in clusters 2 and 3 Table of contentsAcknowledgments …………………………………………………………………… i

Does financial crisis impact earnings management? Evidence from Turkey

“…However, certain studies (Jahmani, Niranjan, & Toney, 2016;Latridis & Kadorinis, 2009;Persakis & Iatridis, 2015) have also presented that earnings quality decreases (EM increases) throughout the financial crisis which is contradictory to the results of our study. The conflicting results obtained here from can be ascribed to the observation that these findings are based on studies that were conducted on listed companies in advanced economies, while our research is in Turkish context which has been regarded as an emerging economy by International Monetary Fund.…”

The contribution of industry to the Greek economy: facts and prospects

“…The importance of earnings quality in raising capital is well-documented in the literature, which supports the view that firms with the best earnings quality enjoy significant discounts in their cost of capital (e.g. Francis et al 2002Francis et al , 2005Persakis and Iatridis 2015;Eliwa et al 2016). This is also corroborated by recent evidence from the corporate bond market where Greek firms with strong fundamentals and high level of earnings quality find financing in international markets at a lower cost, compared with bank loans.…”

Studying the relationship between managerial ability and real earnings management in economic and financial crisis conditions

“…Briefly, according to signalling theory, it is predicted that downturn of economic has a positive effect on earnings management of the firms. Hence, according to signalling theory and findings of previous studies carried out in this field in other countries like Charitou et al (2007), Ahmad‐Zaluki et al, (2007), Iatridis and Dimitras (2013), Franceschetti and Koschtial (2013) and Persakis and Iatridis (2015), hypotheses are presented on the basis of positive relationship between stagflation and earnings management.…”