Earnings Management in State-Owned Enterprises in a Period of Macroeconomic Instability

Abstract

The purpose of this paper is to examine whether and to what extend Greek state-owned enterprises engage in earnings management techniques during 2012-2016. Most prior studies on earnings management have used data from large economies with relative stable macroeconomic contexts (e.g., USA). Our knowledge about earnings management in smaller economies is rather limited. To fill this void, we conducted our study in Greece and focused on the abovementioned period, which is very interesting given that Greece experienced a substantial political and macroeconomic instability (e.g., four elections, one referendum, capital controls, and two memorandums). Two different models (i.e., The Earnings Distribution Model and the Modified Jones Model) are used to provide answers to the research questions. The sample is composed of 50 state-owned enterprises. The results show that Greek state-owned enterprises did not adopt any earnings management techniques during the examined period. These results are rather robust given that they come from two different models. According to the literature, macroeconomic and political instability provide incentives to managers to use earnings management techniques. Interestingly though, our results suggest that this is not the case for a smaller economy. The findings of this study will allow investors, auditors, and users of the financial statements to make better decisions when studying companies that are experiencing those difficulties. The adoption of two different methods and the similar results is an indication of more robust and valid findings.