Abstract
This paper investigates the effect of earnings management practices on firm performance and focuses on how economic policy uncertainty (EPU) moderates the association between earnings management and firm performance. The analysis is based on a sample of French listed companies on the CAC ALL tradable index for the period from 2010 to 2017. Our results show that earnings management is positively associated with firm performance. This finding suggests that accrual- based earnings management, real earnings management and classification shifting are beneficial when managers use accounting choices to reduce agency costs and create value for shareholders. We also find that high EPU triggers a credible signal of lower disclosure quality. It plays an important role in promoting the opportunistic use of earnings management, which harms firm performance. This study is interesting for potential investors, since it underlines the negative effect of managerial opportunistic behaviour on firm performance under policy uncertainty.
Similar content being viewed by others
Availability data statement
The datasets generated and analysed during the current study are not publicly available but are available from the corresponding author on reasonable request.
References
Amidu M, Yorke SM (2017) Tax avoidance and earnings management of firms in Ghana: Does the funding strategy matter? Int J Crit Account 9(3):238–264
Atwood TJ, Drake MS, Myers LA (2010) Book-tax conformity, earnings persistence and the association between earnings and future cash flows. J Account Econ 50(1):111–125
Baker SR, Bloom N, Davis SJ (2016) Measuring economic policy uncertainty. Q J Econ 131(4):1593–1636
Bermejo-Sanchez M, Rodriguez-Ariza L, Martinez-Ferrero J (2015) The link between earnings management and corporate performance: Evidence from family firms. Int J Entrep Small Bus 25(1):106–124
Bloom N (2009) The impact of uncertainty shocks. Econometrica 77(3):623–685
Bonaime A, Gulen H, Ion M (2018) Does policy uncertainty affect mergers and acquisitions? J Financ Econ 129(3):531–558
Broye G, Schatt A (2003) Sous-évaluation à l’introduction et cessions d’actions par les actionnaires d’origine: Le cas français. Finance Contrôle Stratégie 6(2):67–89
Chau F, Deesomsak R, Wang J (2014) Political uncertainty and stock market volatility in the Middle East and North African (MENA) countries. J Int Finan Markets Inst Money 28:1–19
Chen Z, Cheok CK, Rasiah R (2016) Corporate tax avoidance and performance: Evidence from China’s listed companies. Inst Econ 8(3):61–83
Chen PF, Lee CC, Zeng JH (2019) Economic policy uncertainty and firm investment: Evidence from the US market. Appl Econ 51(31):3423–3435
Cohen DA, Dey A, Lys TZ (2008) Real and accrual-based earnings management in the pre-and post-Sarbanes-Oxley periods. Account Rev 83(3):757–787
Cormier D, Demaria S, Magnan M (2017) Beyond earnings: do EBITDA reporting and governance matter for market participants? Manag Financ 43(2):193–211
Dechow PM, Sloan RG, Sweeney AP (1995) Detecting earnings management. Account Rev 70(2):193–225
DeFond ML, Park CW (1997) Smoothing income in anticipation of future earnings. J Account Econ 2:115–139
Demir E, Ersan O (2017) Economic policy uncertainty and cash holdings: Evidence from BRIC countries. Emerg Mark Rev 33:189–200
Desai MA (2005) The degradation of reported corporate profits. J Econ Perspect 19(4):171–192
Ding R, Li J, Wu Z (2018) Government affiliation, real earnings management, and firm performance: The case of privately held firms. J Bus Res 83:138–150
Ebrahim A (2007) Earnings management and board activity: An additional evidence. Rev Acc Financ 6(1):42–58
El Ghoul S, Guedhami O, Kim Y, Yoon HJ (2021) Policy uncertainty and accounting quality. Account Rev 96(4):233–260
Elshafie E, Yen A, Yu M (2010) The association between pro forma earnings and earnings management. Rev Acc Financ 9(2):139–155
Emanuel D, Wong J, Wong N (2003) Efficient contracting and accounting. Account Finance 43(2):149–166
EnamulHoque M, Zaidi MAS (2019) The impacts of global economic policy uncertainty on stock market returns in regime switching environment: Evidence from sectoral perspectives. Int J Financ Econ 24(2):991–1016
Fazeli YS, Rasouli HA (2011) Real earnings management and the value relevance of earnings. Int Res J Financ Econ 62(3):28–37
Gong G, Louis H, Sun AX (2008) Earnings management and firm performance following open-market repurchases. J Financ 63(2):947–986
Graham JR, Harvey CR, Rajgopal S (2005) The economic implications of corporate financial reporting. J Account Econ 40(1–3):3–73
Gulen H, Ion M (2016) Policy uncertainty and corporate investment. Rev Financ Stud 29(3):523–564
Ha K, Thomas WB (2020) Classification shifting and earnings predictability. Available at SSRN 3299152
Handley K, Limao N (2017) Policy uncertainty, trade, and welfare: Theory and evidence for China and the United States. Am Econ Rev 107(9):2731–2783
Hanlon M, Heitzman S (2010) A review of tax research. J Account Econ 50(2 & 3):127–178
Healy PM, Palepu KG (2001) Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. J Account Econ 31(1 & 3):405–440
Healy PM, Wahlen JM (1999) A review of the earnings management literature and its implications for standard setting. Account Horiz 13(4):365–383
Holthausen RW (1990) Accounting method choice: Opportunistic behavior, efficient contracting, and information perspectives. J Account Econ 12(1–3):207–218
Ibhagui OW, Olokoyo FO (2018) Leverage and firm performance: New evidence on the role of firm size. N Am J Econ Financ 45:57–82
Iqbal U, Gan C, Nadeem M (2020) Economic policy uncertainty and firm performance. Appl Econ Lett 27(10):765–770
Jiraporn P, Miller GA, Yoon SS, Kim YS (2008) Is earnings management opportunistic or beneficial? An agency theory perspective. Int Rev Financ Anal 17(3):622–634
Kang W, Lee K, Ratti RA (2014) Economic policy uncertainty and firm-level investment. J Macroecon 39:42–53
Kennedy P (1985) A guide to econometrics. MIT Press, Cambridge
Khuong NV, Ha NTT, Thu PA (2019) The relationship between real earnings management and firm performance: The case of energy firms in Vietnam. Int J Energy Econ Pol 9(2):307–314
Krishnan GV (2003) Audit quality and the pricing of discretionary accruals. Audit J Pract Theory 22(1):109–126
Lazar S (2016) Determinants of firm performance: Evidence from Romanian listed companies. Rev Econ Bus Stud 9(1):53–69
Luttmer E, Samwick A (2018) The welfare cost of perceived policy uncertainty: Evidence from social security. Am Econ Rev 108(2):275–307
Makarem N, Roberts C (2020) Earnings management to avoid earnings boosts. J Appl Acc Res 21(4):657–676
McVay SE (2006) Earnings management using classification shifting: An examination of core earnings and special items. Account Rev 81(3):501–531
Meek GK, Rao RP, Skousen CJ (2007) Evidence on factors affecting the relationship between CEO stock option compensation and earnings management. Rev Acc Financ 6(3):304–323
Mwaniki G, Omagwa J (2017) Asset structure and financial performance: A case of firms quoted under commercial and services sector at the Nairobi Securities Exchange, Kenya. Res J Financ Account 8(4):687–699
Neter J, Wasserman W, Kutner M (1990) Applied linear statistical models, 3rd edn. Irwin, Home-wood
Nigrini MJ (2005) An assessment of the change in the incidence of earnings management around the Enron-Andersen episode. Rev Acc Financ 4(1):92–110
O’Callaghan S, Ashton J, Hodgkinson L (2018) Earnings management and managerial ownership in private firms. J Appl Acc Res 19(4):648–668
Phan HV, Nguyen NH, Nguyen HT, Hegde S (2019) Policy uncertainty and firm cash holdings. J Bus Res 95:71–82
Pindyck RS (1993) Investments of uncertain cost. J Financ Econ 34(1):53–76
Roychowdhury S (2006) Earnings management through real activities manipulation. J Account Econ 42(3):335–370
Shackelford DA, Shevlin T (2001) Empirical tax research in accounting. J Account Econ 31(1–3):321–387
Sial MS, Chunmei Z, Khan T, Nguyen VK (2018) Corporate social responsibility, firm performance and the moderating effect of earnings management in Chinese firms. Asia Pac J Bus Adm 10(2/3):184–199
Stein LC, Wang CC (2016) Economic uncertainty and earnings management. Harvard Business School Accounting & Management Unit Working Paper 16–103
Susanto YK, Pradipta A (2016) Corporate governance and real earnings management. Int J Bus Econ Law 9(1):17–23
Tang HW, Chang CC (2015) Does corporate governance affect the relationship between earnings management and firm performance? An endogenous switching regression model. Rev Quant Financ Acc 45(1):33–58
Teoh SH, Welch I, Wong TJ (1998) Earnings management and the long-run market performance of initial public offerings. J Financ 53(6):1935–1974
Wang W, Zheng K (2020) Real earnings manipulation and future performance: A revisit using quarterly data of firms with debt covenants. Rev Financ Econ 38(1):76–96
Yung K, Root A (2019) Policy uncertainty and earnings management: International evidence. J Bus Res 100:255–267
Zalata A, Roberts C (2016) Internal corporate governance and classification shifting practices: An analysis of UK corporate behavior. J Acc Audit Financ 31(1):51–78
Zang AY (2012) Evidence on the trade-off between real activities manipulation and accrual-based earnings management. Account Rev 87(2):675–703
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of interest statement
All authors have participated in conception and design, analysis and interpretation of the data, drafting the article or revising it critically for important intellectual content; and approval of the final version. This manuscript has not been submitted to, nor is under review at, another journal or other publishing venue. The authors have no affiliation with any organization with a direct or indirect financial interest in the subject matter discussed in the manuscript.
Additional information
Publisher's note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Appendix
Appendix
Rights and permissions
Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
About this article
Cite this article
Kahloul, I., Grira, J. & Hlel, K. The trilogy of economic policy uncertainty, earnings management and firm performance: empirical evidence from France. J Econ Finan 47, 184–206 (2023). https://doi.org/10.1007/s12197-022-09605-8
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12197-022-09605-8