Business Publications
Document Type
Article
Publication Date
3-2018
Volume
49
Issue
1-2
Journal
Journal of Business Finance & Accounting
First Page
69
URL with Digital Object Identifier
https://doi.org/10.1111/jbfa.12564
Last Page
110
Abstract
We examine the behavior of a large sample of private firms before and after the elimination of an inflation adjustment system in Colombia in 2007. We show that firms avoid reporting small losses by exercising considerable discretion in their use of inflation adjustments, and find that this discretion is greater for firms that rely more on bank financing. Furthermore, we show that firms that manage earnings to report small positive profits are able to issue more bank debt the year following the reporting. After the law change, firms resort to other means to report positive earnings. In particular, the use of non-operating revenues increases, driven at least in part by higher use of real activities through asset sales. Finally, we evaluate the performance of modelbased earning management measures commonly used in the literature. We highlight the potential difficulties in relying solely on these conventional measures where “normal” reporting has to be modeled in order to estimate “abnormal” behavior.
Notes
This is the author's version of: Restrepo, Felipe and Jerome P. Taillard, 2021, "Private firms’ incentives and opportunities to manage earnings: Evidence from the use of inflation adjustments". Journal of Business Finance & Accounting, vol 49, no 1-2, pp 69-110. Available at https://doi.org/10.1111/jbfa.12564.