Exploring Financial Motives for Earnings Management in the Economic Crisis. Evidence from Greek and German Listed Companies

The study examines the impact of economic crisis and focuses on the reasons for cases of earnings management. More specifically, it analyses whether executive compensation, analysts’ forecasts and violation of debt covenants are important motives for accounting fraud. It also examines whether voluntary disclosure of financial information could improve the quality of financial information or confuse investors. The paper examines listed companies in the Greek and German stock markets from 2007 to 2009 to find out how these two economies reacted after the introduction of IFRS. Thus, it would be interesting to find out whether Germany, a strong EU economy, was able to eliminate earnings management motives, as most would predict, while also examining whether Greece, a weak economy, was able to achieve similar results. The results of the study provide useful insights as they confirm that companies that provide additional accounting disclosures perform better in both countries. However, the remaining results suggest that credit covenant violations, executive compensation and bonuses, and analyst forecasts remain strong motivators for earnings management in both countries studied. In this order, it seems that IFRS need to introduce and maintain improved mechanisms to overcome such phenomena.