Governmental reforms and earnings management: examining their influence during a crisis

Purpose This paper examines the ability of those governmental reforms adopted in response to the COVID-19 outbreak to affect earnings management (EM). Design/methodology/approach The paper focuses on the Italian decision to suspend the recapitalization obligation to guarantee the respect of the going concern’s assumption. By analysing a sample of unlisted entities, this analysis uses different techniques to detect EM before and after the suspension of that obligation. Findings The results suggest that EM decreased after the decision to suspend recapitalization obligations. Research limitations/implications Accounting quality depends on not only accounting standards but also management practices in response to those government measures instituted during the COVID-19 outbreak. Originality/value The results are a novelty in the literature. In terms of the institutional theory, they provide evidence of EM decrease, thereby validating the assumption that regulation can enable and empower social actors – particularly their actions – despite the visions of repression and constraint conjured by that concept. Isomorphism theory supports the thesis and results that indicate that EM decreases not only in emerging markets, where corporate governance mechanisms are less able to obstruct EM, but also in the developed countries. Thus, insightful and novel conceptualizations can still be achieved by using institutional theory. Yet the findings also extend agency theory assumptions and demonstrate that also the issuance of less severe regulation can reduce agency costs and, in turn, also EM.