Parents’ Use of Subsidiaries to “Push Down” Earnings Management: Evidence from Italy

Bonacchi, Massimiliano; Cipollini, Fabrizio; Zarowin, Paul

doi:10.1111/1911-3846.12330

Cited by 45 publications

(38 citation statements)

References 75 publications

(182 reference statements)

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“…Similarly, we control for the listing status of the parent company (ListedP), since the capital markets' pressure generates incentives for parent companies to manipulate their subsidiaries' accounts (Bonacchi et al, 2017), and in our sample the rate of listed parent companies is substantially higher among foreign investors, which is as expected because the rate of public companies in Spain is much lower than in many of the countries where the FDI comes from.…”

Section: δX Annual Change Of the Variable Xmentioning

confidence: 98%

“…Accordingly, several studies document lower reporting quality in the private setting: Ball and Shivakumar (2005) in the UK; Hope et al (2013) in the US; Burgstahler et al (2006) in a set of European countries; Goncharov and Zimmerman (2006) in Russia; or Arnedo, Lizarraga, and Sánchez-Alegría (2007) in Spain. There is also evidence that public companies use their private subsidiaries to manage the group's consolidated earnings in order to overcome the restrictions imposed by capital markets (Bonacchi, Cipollini, & Zarowin, 2017).…”

Section: Related Literature and Hypotheses Developmentmentioning

confidence: 99%

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Foreign ownership and financial reporting quality in private subsidiaries

Noguer

Rusanescu

2017

Spanish Journal of Finance and Accounting / Revista Española de

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Los documentos de trabajo del Ivie ofrecen un avance de los resultados de las investigaciones económicas en curso, con objeto de generar un proceso de discusión previo a su remisión a las revistas científicas. Al publicar este documento de trabajo, el Ivie no asume responsabilidad sobre su contenido.Ivie working papers offer in advance the results of economic research under way in order to encourage a discussion process before sending them to scientific journals for their final publication. Ivie's decision to publish this working paper does not imply any responsibility for its content.La Serie EC, coordinada por Matilde Mas, está orientada a la aplicación de distintos instrumentos de análisis al estudio de problemas económicos concretos.Coordinated by Matilde Mas, the EC Series mainly includes applications of different analytical tools to the study of specific economic problems.Todos los documentos de trabajo están disponibles de forma gratuita en la web del Ivie http://www.ivie.es, así como las instrucciones para los autores que desean publicar en nuestras series.Working papers can be downloaded free of charge from the Ivie website AbstractIn a sample of large private Spanish subsidiaries, we find that the magnitude of discretionary accruals is significantly higher when the parent company is foreign than when it is local. Our tests support the thesis of recent research on earnings management strategies within multinational corporations (MNCs), suggesting that the parent company's incentives underlie the observed negative relation between foreign ownership and financial reporting quality at the subsidiary level. In particular, we observe that: (1) the tenure of the controlling shareholder has a negative incremental effect on financial reporting quality in firms under foreign control, but not in subsidiaries of local groups; and (2) the negative association between foreign ownership and financial reporting quality is mainly driven by the subsample of subsidiaries with parent companies located in countries with higher institutional quality than Spain.H3: the relation between foreign ownership and financial reporting quality is sensitive to the institutional quality in the parent company's country of origin.

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Section: δX Annual Change Of the Variable Xmentioning

confidence: 98%

Section: Related Literature and Hypotheses Developmentmentioning

confidence: 99%

Foreign ownership and financial reporting quality in private subsidiaries

Noguer

Rusanescu

2017

Spanish Journal of Finance and Accounting / Revista Española de

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“…Given the expectation that most of our participants would be CFOs or controllers of privately held companies, we selected a financial target that would be relevant to both private and public companies (versus equity-based pressures). Indeed, both Bonacchi et al (2017) and Bianchi 19 Participants were post-experimentally asked to recall 1) the difference between the company's net income and cash flow from operations, and 2) the difference between the company's sales growth and growth in NFMs (measured via scales, where 1 = "Very small" and 7 = "Very large"). Non-tabulated results indicate that those in RED FLAGS present condition rated both of these differences to be significantly larger than those in the RED FLAGS not present condition (both p's < 0.01).…”

Section: Independent Variablesmentioning

confidence: 99%

Reporting Concerns About Earnings Quality: An Examination of Corporate Managers

2020

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Using an experiment with corporate financial managers (e.g., CFOs, controllers), we find that when red flags are present in the financial statements under their review, managers identify those red flags and, in turn, have greater concerns over earnings quality. In addition, when pressure to meet a financial target is high, managers are more concerned about earnings quality when red flags are present. We also document that when red flags are present, managers are more likely to report both internally to their CEO and, if their concerns are not resolved internally, externally to their auditor. Pressure to meet a financial target directly influenced the decision to report internally, but not externally. Additional analyses contemplate the countervailing personal costs associated with reporting or not reporting earnings quality concerns. We demonstrate the important role short-term costs play in external reporting decisions. Finally, we provide initial evidence that corporate managers with a longer tenure at their position (public accounting background) are less (more) likely to report externally.

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“…Unlike previous studies in the field (Huizinga & Laeven, 2008;Heckemeyer & Overesch, 2013;Bonacchi, Cipollini & Zarowin, 2018), this paper works only with individual financial data of subsidiaries. Mentioned studies utilise data from both consolidated statements of a parent company and individual financial statements of its subsidiaries to identify tax optimisation.…”

Section: Introductionmentioning

confidence: 99%

Tax-in or Tax-out? Evidence from the relation of financial performance and effective taxation of Czech subsidiaries under foreign control

Procházka

2019

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The paper evaluates the financial performance of Czech entities under control of companies listed in the EU and its relation to effective tax rates. Using individual corporate data, empirical evidence of 4,917 year-firm observations indicates a wide dispersion both in performance and taxation. The domicile of the parent has an impact on the subsidiary’s effective tax rate and the effective taxation of Czech subsidiaries under control of foreign listed parents is significantly lower than for other Czech companies. Despite exhibiting tax avoidance to some extent, the data reveal significant variability in relative tax rates suggesting that the majority of foreign parents from western and northern EU countries prefer to tax profits in the Czech Republic rather than elsewhere. Shifting profits to the Czech Republic results in superior reporting performance of the affected subsidiaries. In contrast, empirical evidence shows that parent companies from southern EU countries seek ways to avoid taxation. The unclear tax motives of both parent company groups hinder an appropriate assessment of the financial performance of subsidiaries from being conducted.

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Parents’ Use of Subsidiaries to “Push Down” Earnings Management: Evidence from Italy

Cited by 45 publications

References 75 publications

Foreign ownership and financial reporting quality in private subsidiaries

Foreign ownership and financial reporting quality in private subsidiaries

Reporting Concerns About Earnings Quality: An Examination of Corporate Managers

Tax-in or Tax-out? Evidence from the relation of financial performance and effective taxation of Czech subsidiaries under foreign control

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