EXAMINATION OF ACCRUAL-REAL EARNINGS MANAGEMENT AND THE FINANCIAL CRISIS

Abstract

The 2007/2008 global financial crisis caused tremendous economic and financial upheavals with inordinate national and international impact. The economic downturn and shift in the macro-economic landscape seemingly encouraged financiers to invest in what they now consider as ‘’safe’’ assets. The declining liquidity and flight to safety had a fundamental bearing on access to funds by organizations for example small firms were now perceived as being too risky whilst other organizations drew down heavily on existing credit lines as they were anxious that this would be revoked. With the change in perception of risk, firms needed to show resilience and stability and that they were less affected by the financial crisis and thus had healthier prospects and a viable option. Funders were still inclined to invest in organizations with sturdy financial results. This paper hypothesizes that earnings management and the motivation to manage positively the reported numbers would come into focus as managers of firms are now motivated by the incentive to improve their financials to signal to the market that they are ‘’safe’’ to fund and trade with and that they are in a position to service their debt thus avoiding restrictive action on their credit. This research focuses on the costs and benefits of accrual and real earnings management methods and their use before, during, and after the financial crisis periods. It examines earnings management as used by UK-listed firms. The results provide evidence of the use of earnings management methods that is dependent on the size of the firm and its constituent financial constraints. The argument would be that as the supply side of funding declines during the financial crisis and liquidity becomes less available so does the additional and extra need for firms to improve their financial performance so as to attract these limited resources and also avoid paying excess interest charges on the same.