Principle-based accounting standards and earnings management in private hotel firms: The impact on government subsidies

Abstract

Effective 2015, the new Hellenic Accounting Standards (HAS) introduced a principle-based financial reporting environment to the Greek business setting. The scope of this study is to examine the impact of new HAS on the accounting quality (earnings management and income smoothing behaviors) of private hospitality firms in Greece, and the subsequent effect on the granting of government subsidies. The empirical analysis used accounting data from 3928 unique hotel firms operating in Greece, over the period 2003–2018. Panel fixed effects and logit regression analysis indicated that the introduction of the new principle-based HAS contributed to an increase in earnings management and income smoothing behaviors of private hotel firms. Furthermore, the deterioration of accounting quality under the new HAS was more severe for medium and small hotel firms, relative to their larger counterparts. Furthermore, the subsequent increase of earnings management by small and medium sized firms was accompanied by an increase of government subsidies, suggesting that SMEs with reduced accounting quality were rewarded with higher government financing under the new accounting regime.