Does Financial Crisis Impact Earnings Management?

Abstract

Investors use the information pertaining to the earnings to make their investment decisions, The aim of this study is to display the impact of global financial crisis of 2008 on earnings management with the case of listed manufacturing firms in Borsa Istanbul. In addition, it enriches the earnings management literature by focusing on an emerging economy, Turkey, which has not been sufficiently examined in relation to this topic. The study employed data from 2007 to 2012 with 138 observations and 828 firm years. Discretionary accruals were computed using the modified Jones model used in Dechow et al. (1995) and Kothari et al. (2005) as a measure of earnings management. The ordinary least squares method was used. The study registered a high level of earnings management in the manufacturing firms of Turkey during the pre-crisis period, a significant drop during the crisis period, and an appreciation again in the post-crisis period.

Keywords: Earnings management, Accounting Quality, Borsa Istanbul, Financial crisis, Investor Protection.

Introduction

The managers within organizations often indulge in account manipulation as well as earnings management to meet stakeholders’ expectations which results in financial reporting that may not accurately present the firms’ operations. The quality of financial reporting has drawn enormous attention over the years, particularly after the discovery of a set of corporate scams such as the Enron in 2001, and WorldCom and Tyco in 2002 (Kumar & Vij, 2017). The quality of accounting information is vital for all the stakeholders of a company including customers, managers, market, state, but specifically for investors for it assists in the decision-making process (Bhattacharya et al., 2013).

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Transparency in financial reporting facilitates evaluation of the financial condition of an entity for the investors, creditors, and other market participants. Along with better decision making, transparency also increases the confidence of the investors concerning the fairness of the markets (Fung, 2014). Introducing window dressed accounting images increases information asymmetry, which regulates the functioning of financial markets which acts as a major motivation for the managers to indulge into such practices. However, there are various situations where the users can be influenced in one way or another by presenting distorted information, and thus, their behaviour can easily be manipulated. Despite the raft of corporate governance, and various reforms being introduced in financial disclosure practices, corporate accounting still continues to be murky, and companies still have various ways of playing hide-and-seek with the system (Bhasin, 2016).

The financial crisis and recent financial scandals associated with faulty accounting practices have led to a diminution in the trust of investors, adversely affecting the listed financial firms (Bartram and Bodnar, 2009). Earnings management may be defined as ‘purposeful intervention in the external financial reporting process with the intent to obtaining one private gain’ (Schipper, 1989). Earnings management, hence, transpires when manipulations in accounting statements such as balance sheet and income statements are done where these changes are still in compliance with the law and might mislead some stakeholders (Wu, 2014).

The investors’ confidence typically lowers during the financial crisis periods because it is believed that the flexibility of accounting standards and exploitation by the managers make the earnings management influence the quality of financial statements during this period (Gorgan et al., 2012). Earnings management has been a subject area which has been receiving sufficient interest of several researchers in recent years (Healy and Wahlen, 1999; Dechow and Skinner, 2000). The authors are drawn to the study of earnings management to understand how the recent financial crisis has influenced it (Filip and Raffournier, 2014; Cimini 2015; Costa et al., 2016). Thus, there have been a lot of studies that have been conducted regionally and internationally on the factors affecting the ability to disclose non-financial, CSR disclosure information but there have been limited studies that have attempted to study the factors affecting the window dressing of the financial statements.

Therefore, in the dimension of this research, the aim of this study is to display the impact of financial crisis on earnings management with the case of listed manufacturing firms in the Turkish context has been discussed. The present study attempts to bridge the gap in the literature by providing the association between periods of financial crisis and earnings management in the context of the economy of Turkey which is a study area which was previously unexplored.

This study makes three contributions to the literature. First, earnings management in the context of the financial crisis is a relatively recent topic and seems to be of great interest to the academicians and research scholars owing to the various studies conducted in this context such as the ones conducted by Ming Chia et al., 2007; Kacharava, 2016; Filip & Raffournier, 2012, 2014; Paolone et al., 2015; Cimini, 2015; Costa et al., 2016; Kumar & Vij, 2017. However, all of these studies are related to different countries or regions. Thus, this study extends this research by applying on Turkish firms as the manufacturing firms in Turkey have distinct characteristics in terms of management of organizations, composition and business systems, accounting policies relevant to disclosures, the level of external impact in business operations and production processes and economic changes.

Second, it deepens the literature by centering an emerging economy and to the best of my knowledge, this is the original study that analyses the impact of financial crisis on earnings management with the case of listed manufacturing firms in the Turkish context. Borsa Istanbul, is a perfect applicant for observing problems regarding to earnings management due to its noteworthy part of family-owned listed structures. Besides, the Turkish case of the lack of protection of investor and minority rights are in alignment with similar practices of other emerging economies.

Third, the present study provides evidence on the level of earnings management increased in the post-crisis period in Turkey. Such an increase may be attributed to the restricted behaviour that the management had to exhibit during the financial crisis period. Hence, after a period of being restricted to manipulate the earnings during the crisis period, the managers tend to practice earnings management more in the post crisis period owing to the various motives associated with it. Internalizing the essence of these effects is vital for various stakeholders like, accountants, auditors, and internal and external decision makers. On the other hand it also helps the policy makers to cater for the interest of the small and minority shareholders by reducing asymmetric information.

This study detects likely future studies by underlining the earnings management practices during crisis period. Moreover, it highlights the findings of the emerging economies and advanced economies differed with respect to the impact of financial crisis on earnings management. The remainder of the paper is structured as follows. Section 2 provides the framework on earnings management and financial crisis. Section 3 describes research objectives. Section 4 displays the conceptual framework and hypotheses. Section 5 defines methodology, Section 6 displays research approach while Section 7 displays research design, Section 8 indicates sample and data collection, Section 9 provides the analysis and findings. Finally, Section 10 presents the study’s conclusions.

Earnings Management and its Models

There are various models that enable the study of the earnings management, but the models that are quite frequently employed in the literature are based on accruals as they allow us to understand the behaviour of discretionary accruals and recognise earnings management practices undertaken by the managers. The models based on accruals will enable distinguishing between discretionary and nondiscretionary accruals (Costa et al., 2016). The models vary from the simple models, in which the total accruals are employed for measuring discretionary accruals to the relatively sophisticated (regression), which disintegrate accruals into separate discretionary and nondiscretionary components (Bartov et al., 2000). The most popular six models are the DeAngelo (1986) Model, Healy (1985) Model, the Jones (1991) Model, the Modified Jones Model (Dechow, Sloan, and Sweeney 1995), the Industry Model (Dechow, Sloan, and Sweeney 1995), and the Cross-Sectional Jones Model (DeFond and Jiambalvo 1994). These have been explained as follows:

The DeAngelo Model

The DeAngelo (1986) Model makes use of the previous period’s total accruals (TAt – 1) scaled by lagged total assets (At-2) for measuring non-discretionary accruals. Thus, the model for nondiscretionary accruals (NDAt) is as follows:

The discretionary portion of accruals can be computed as the difference between total accruals in the event year t scaled by At-1 and NDAt.

The Healy Model

The Healy (1985) Model utilizes the average of total accruals (TAt) scaled by lagged total assets (At-1) from the evaluation period for measuring nondiscretionary accruals.

The discretionary portion of accruals can be ascertained by computing the difference between total accruals in the event year t scaled by At-1 and NDAt. While the DeAngelo Model may appear a special case of the Healy (1985) Model as in the former, the estimation period for nondiscretionary accruals is limited to the previous year’s observation, the two models are actually quite different. While the underlying assumption in the DeAngelo Model is that NDA follows a random walk process, however, for the Healy Model NDA following a mean reverting process is assumed.

The Jones Model

Jones (1991) proposed a model that ventures to check for the impact of changes in the economic circumstances of a firm on nondiscretionary accruals. The Jones Model for nondiscretionary accruals in the event year can be represented as follows:

Where, NDAt represents the nondiscretionary accruals in year t scaled by lagged total assets;

∆REVt signify the revenues in year t minus the revenues in year t – 1;

PPEt refers to the gross property plant and equipment at the end of year t;

At – 1 represents the total assets at the end of year t – 1;

And, α1, α2, α3 are representative of the firm-specific parameters.

a1, a2, and a3 represent the OLS estimates of α1, α2, and α3, and TAt denote the total accruals in year t. εt is the residual, which depicts the firm-specific discretionary division of total accruals. Other variables are similar to the previous equation.

The Modified Jones Model

The Modified Jones Model has been devised to remove the conjectured tendency of Jones Model to estimate the discretionary accruals with the error when preference is exercised over revenue. The Modified Jones Model has been devised to remove the conjectured tendency of Jones Model to estimate the discretionary accruals with the error when preference is exercised over revenue identification. The transformed model proposes the nondiscretionary accruals to be assessed during the event year, i.e.

∆RECt denotes the net receivables in year t minus the net receivables in year t – 1, and the other variables are similar to that in the unmodified Jones model. It is essential to note here that the estimations of α1, α2, α3 are those obtained from the unmodified Jones Model and not from the modified version. The only modification that has been applied to the original Jones Model in the modified version is with respect to the change in revenues which has been adjusted for the change in receivables in the event year, i.e., the year in which the earnings management is hypothesized.

The Industry Model

The Industry Model unwinds the assumption that nondiscretionary accruals remain constant over time. Instead of venturing the modeling of the determinants of nondiscretionary accruals directly, the Industry Model considers that the change in the determinants of nondiscretionary accruals are shared across the firms within the same industry.

NDAt is as in the Jones Model, medianj (TAt / At – 1) denotes the median value of the total accruals in year t scaled by lagged total assets for all the non-sample firms in the related two-digit standard industrial classification (SIC) industry (industry j). The firm-specific parameters β1 and β2 are measured using OLS on the observations recorded for the estimation period.

The Healy Model, the Jones Model and the Industry Model are evaluated over the period of eight years ending just before the event year. For instance, discretionary accruals for the first sample year, say for 2010 are estimated on the basis of models evaluated over the eight-year period 2002 – 2009, discretionary accruals for the following sample year, 2011 have to be estimated on the basis of the models considered over the period 2003 – 2010, etc. The choice of estimation period explained above has been adopted from prior research works (see, e.g., Dechow, Sloan, and Sweeney 1995, 2003) which represents a tradeoff. While applying long-term series of observations enhances estimation efficiency, it also gives way to smaller sample size and increases the possibility of a structural change transpiring during the estimation period.

The Cross Sectional Models

The two cross-sectional models that this study examined are the Cross-Sectional Jones Model and the Cross-Sectional Modified Jones Model. These two models are comparable to the Jones and Modified Jones models, respectively, besides that the parameters of the models are assessed by using cross-sectional data instead of the time-series data (see, e.g. DeFond and Jiambalvo 1994). Thus, the parameter measures of α1, α2, and α3 based on the equation as given under the Jones model are industry-specific and specific to the years under estimation rather than being firm-specific. These are achieved by estimating using the next equation explained under the Jones model for calculating a1, a2 and a3 using data from all firms matched on the year (i.e., the event year) and the two-digit SIC industry groupings.

Motivations to practice Earnings management

Past studies propose that there are several underlying incentives for firms to practice earnings management. Burgstahler et al. (1997) in their research provided systematic evidence that firms inflate the reported earnings to accomplish various incentives. The extensive use of accounting information by the financial analysts and the investors to assist with the valuation of stocks can serve to be an incentive for managers to manipulate earnings in an endeavour to control short-term stock price performance.

Recent literature proposes that the potential earnings management strategies at the time of SEO issuance and in other environments are not just confined to an overstatement of accruals, but it can also involve manipulation of real activities (Cohen & Zarowin, 2010; Zang, 2011; Badertscher, 2011). Graham et al. (2005) claimed that managers favoured real earnings management as compared to the accrual-based earnings management as accrual manipulation was expected to be subject to more scrutiny by the external auditors and governing bodies while the manipulation of real activities had faint chances of being detected. Moreover, Cohen, Dey & Lys (2008) determined that companies had shifted from accrual-based to real earnings management after the issuance of the Sarbanes-Oxley Act (SOX) in 2002.

According to Chen & Tsai (2010), altruistic motivation, speculative motivation, and pressure from affiliated parties are the different motives that usually propel earnings management. According to Mizik (2010), managers feel compelled to satisfy earnings projections because market directs at punishing companies who fail to suffice analysts’ expectations. Further, a study by Goel & Thakor (2003) discovered that managers manipulate earnings when their payment contract is tied to the firm’s performance. Likewise, Latridis and Kadorinis (2009) reported that managers employ earnings management to raise their compensation.

Conclusively, the abundance of evidence on the stock-market effect of earnings figures clearly indicates that, notwithstanding concerns on earnings management, investors still view earnings as value-relevant data which is viewed to be more informative than the cash flow data. This finding has been reproduced over several periods and in various cultural contexts. This implies that the investors do not see earnings management as so ubiquitous as to make earnings data misleading. This interpretation has been confirmed by Dechow’s (1994) findings which suggest that current earnings are useful predictors of future cash flows than the current cash flows.

Earnings Management and Financial Crisis

Kumar & Vij (2017) attempted to investigate the earnings management behaviour of Indian companies during the global financial crisis in 2008 and compared these with the period before and after the crisis. It used the financial data of S&P CNX 500 firms for the period ranging from 2007-2012. The results of the present study confirmed a high level of earnings management in companies during the pre-crisis period, a significant decrease in it during the crisis period, and an accession repeated in the post-crisis period. The study additionally examined the earnings management behaviour dividing the firms into two divisions – firms having positive discretionary accruals and firms having negative discretionary accruals. They discovered that earnings management in both these classes of firms decreased during the crisis period and improved in the post-crisis period for firms with negative discretionary accruals.

Filip & Raffournier (2014) studied to examine the impact of the 2008 global financial crisis on the earnings management behaviour of the European-listed companies. They reviewed the data of 16 countries for the purpose. They found that that earnings management significantly decreased during the crisis period. This trend was similar for most of the 16 countries that were reviewed. They also reported a connection between the level of earnings management and the rate of economic growth rate.

Berndt et al. (2010) investigated the impact of financial crisis on earnings management behavior in the banking sector of Germany during the financial crisis 2007-2008. As per the results of this study, earnings management was found to be used with the balance sheet as well as income statement items and had been verified with different proxies. Additionally, they found that earnings management was driven by company size, the function of equity markets for firm financing and the fragmentation of shareholders. Overall, the results indicated a decrease in the ability of the earnings in being explanatory and informative for market participants during the financial crisis as plentiful evidence for earnings management was found.

Mollik et al. (2013) examined whether the Australian firms engaged in a greater level of earnings management during the global financial crisis and whether or not there was any industry-specific impact on firms’ earnings management. They used parametric and non-parametric tests along with the panel data regression techniques to investigate the impact of the financial crisis and industry effect on the discretionary accruals. The sample used for this study consists of 149 Australian firms during the 2006 to 2009 period. The study concluded that the Australian firms got involved in a higher level of income-lowering earnings management during the global financial crisis.

Therefore, the literature suggests that there have been various studies in the context of different countries in the chosen domain, i.e. the association between earnings management and financial crisis, but, there had been an absence of evidence towards the same in the context of Turkey. Hence, the present study intends to establish the same, i.e. the impact of the financial crisis on earnings management with the case of listed manufacturing firms in the Turkish context will be explored in this study.

Research Objectives

The primary objective of this study is to analyse the impact of the financial crisis on earnings management in the case of Borsa Istanbul listed manufacturing firms in the Turkish context. The main idea is to establish that whether or not the earnings management behaviour differs during the period or period following the financial crisis in Turkey and to establish the trend of such behaviour during, pre and post the financial crisis. The following represents the summation of all the objectives this research will cater to:

• examine the earnings management behaviour of the Turkish manufacturing firms listed on Borsa Istanbul.
• study the earnings management behaviour of listed manufacturing firms during, before and post the global financial crisis.
• analyse whether firms’ earnings management behaviour is unusual during the global financial crisis as compared to the normal period.
• examine whether the earnings management activities during and post the financial crisis increases or decreases.

Conceptual Framework and Hypotheses

For the present study, the period under study has been chosen to be 2007-2012 which will be divided into 3 periods, i.e. 2007 and 2008 which will be taken as the pre-crisis period, 2009 and 2010 will be taken as the crisis period and 2011 and 2012 will be taken as the post crisis period. The present study attempts to highlight the differences in the earnings management behaviour for all of these three periods to better accentuate the impact of Financial crisis on earnings management. The choice of years is similar to that of the previous researchers Kumar & Vij (2016) who conducted a research assuming the same variables, but, in Indian context. The present study will study the same impact in Turkish context.

As presented in the previous sections, the literature presents that the influence of the financial crisis on earnings management of firms is uncertain. Some claim that the motivation behind engaging in earnings management is higher during the economic crisis while there are also certain studies that present a lower inclination of the firms towards engaging in earnings management during the years of crisis. Hence, owing to the lack of clarity on this aspect, the paper hypothesizes the following to study the impact of financial crisis on earnings management in the context of Turkey:

Hypothesis

• Earnings Management among Turkish firms decrease during the period of financial crisis.
• Earnings Management among Turkish firms increase during the period of financial crisis.
• Earnings Management among Turkish firms decrease during the period post the financial crisis.
• Earnings Management among Turkish firms increase during the period post the financial crisis.

Methodology

In this study, the impact of the 2008 global financial crisis on earnings management behaviour of Borsa Istanbul companies was empirically examined. The study employed the economic data of Borsa Istanbul listed manufacturing companies from 2007 through 2012. Discretionary accruals were computed using the modified Jones model used in Dechow et al. (1995) and Kothari et al. (2005) as a measure of earnings management. The analytical tools used for making these computations were Ms Excel and SPSS. The calculation of lagged variables was performed on Ms Excel. The regression residuals were calculated on SPSS by running regression using the ordinary least squares method. Further, the model computations to estimate the discretionary accruals were carried out using Ms Excel.

Research Approach

The reasoning approach adopted in this study will be the deductive approach. The study is based on establishing results to outline the impact of financial crisis on earnings management behaviour of Turkish firms through a quantitative analysis using the secondary data extracted from the financials of the manufacturing firms listed on Borsa Istanbul. The results would be outcome oriented. The data is collected from the financials of the manufacturing firms listed on Borsa Istanbul, hence, the approach is deductive as there are predefined variables, i.e. financial crisis and its impact on the earnings management behaviour. Also, there is a pre-established set of hypotheses (refer previous section) being tested in the study and the study assumes a top-down approach. Therefore, the research confirms all the requirements of being a deductive study.

Research Design

The purpose of this study is to identify and to describe the impact of periods of the financial crisis on the earnings management behaviour with specific reference to Turkey. The focus of the research is towards a description of the state of events as they were in Turkey during the Global Financial Crisis, i.e. to explore that whether or not financial crisis has any role in increasing/decreasing earnings management activities. Hence, the research design adopted in this study will be a descriptive research design. Further, the research is based on a set of hypotheses that are required to be tested and deals with the ‘what’ aspect of the probe, i.e., what is the impact of financial crisis on earnings management behaviour. Hence, this study is expressive and aims at the description of the state of earnings management in Turkey and the impact that the financial crisis renders to it; the chosen research design is the descriptive research design.

Sample and Data Collection

In this research, the publicly available stock companies listed at BIST are examined for eight years, between 2007 and 2012. The reason for selecting this period is that the pervious financial crisis took place on 2008 and in this study the time period is divided into 3 periods. 2007 and 2008 which will be taken as the pre-crisis period, 2009 and 2010 will be considered as the crisis period, and 2011 and 2012 will be taken as the post-crisis period. Financial reports are obtained from the ʻPublic Disclosure Platformʼ. Firms that have inadequate data are eliminated. The final sample data is from 2007 to 2012 with 138 observations. In total, there are 828 firm years. The unit of measurement is Turkish Lira (TL).

Data Analysis

In this study, the impact of the 2008 global financial crisis on earnings management behaviour of Borsa Istanbul companies was empirically examined. The manufacturing companies were taken for this purpose and the computation of discretionary accruals was carried out. The modified Jones Model developed by Dechow et al. (1995) was used for the measurement of earnings management based on various metrics, i.e. the change in the sales revenue, Return on Assets (ROA) and Property, plant and equipment. The only difference in this model as matched to the Jones Model is that change in receivables is subtracted from the change in sales revenue. The idea behind such deduction is that dressing cash sales is comparatively complicated and thus, the credit sales are more susceptive to manipulation by the management. Descriptive statistics establishing the trend of each of these metrics within the different periods selected would be presented in the further sections. Further, correlation analysis and a multivariate analysis was performed between these metrics. Following equation has been used to estimate the discretionary accruals cross-sectionally.

The residuals obtained from Equation 1, εt signify the measure of discretionary accruals. Following Filip and Raffournier (2014), the standard deviation of this measurement error, JM1, has been taken as the first measure of earnings management for this study. The second metric for this study is based on the suggestion of Kothari, Leone, and Wasley (2005) who proposed the inclusion of return on assets (ROA) in the modified Jones Model which is a measure of performance. This was intended to check for the impact of the performance of the firms on the unforeseen accruals. Following equation has been used to estimate the discretionary accruals cross-sectionally.

Again, following Filip and Raffournier (2014), the second metric of earnings management (JM2) taken in this study represents the residuals from equation 2. Overall, a high value of these metrics JM1 and JM2 will indicate low accrual quality which will direct towards a higher level of earnings management.

All results obtained here from have been presented comprehensively in the Appendix section and these results have been discussed in the next section

Findings and Discussion

The values obtained for the two respective earnings management measures used in the study for an aggregated sample, the three sub-periods for pre-crisis, during-crisis, and post-crisis periods.

Both measures depict a similar trend with a sharp fall during the year 2009. The highest values for JM1 (0.1022) and JM2 (0.1120) are in the year 2008, whereas the lowest values for both JM1 (-0.0030) and JM2 (-0.0055) are in 2009. According to Dechow and Dichev (2002), a high value of JM1 reflects low accruals quality and a high level of earnings management. Hence, the observations of this study register that the quality of accruals has risen sharply during the crisis period and therefore, there was a lower level of earnings management during the crisis period in Turkey, hence, the null hypothesis with respect to the first hypothesis was accepted.

Comparing the mean values of JM1 and JM2, these values were found to be the lowest (JM1 = 0.0261 and JM2 = 0.0189) for the pre-crisis period (2007-2008) which was quite close to their corresponding values during the crisis (2009-2010) but considerably lesser than the values obtained for the post-crisis (2011-2012) period. The highest values for these indicators have been obtained for the period during the post-crisis period with JM1 = 0.0758 and JM2 = 0.0776. The mean value of JM1 raised from 0.0261 in 2007-2008 to 0.0277 in 2009-2010 and then further progressed to 0.0758 in 2011-2012. Similarly, for JM2, the mean value increased to 0.0278 in the crisis period from its original value 0.0189 in the pre-crisis period and in the post-crisis period, the value increased further to 0.0776. The differences between the two sub-periods were computed which were found to be significant at normal levels, with the difference between the mean of JM1 for pre-crisis and during the crisis period being the only exception. Hence, the alternate hypothesis within the second hypothesis has been accepted which suggests that the level of earnings management increased in the post-crisis period in Turkey.

Comparing the results of the present study with previously established studies, it comes to the surface that the results of our study are consistent with certain studies (Ahmad-Zaluki et al., 2011; Kumar & Vij, 2016) in the sense that our results show lesser incentive for the management to practice earnings management during the crisis period as in such period the investors are ready to accept poor performance of the firms and the market does not punish for an alleviated performance.

Thus, the management has a lesser incentive to manipulate the earnings. Further, the results of this study are also consistent with the results of the study by Chia et al. (2007) who presented that the managements abstain from manipulating the earnings in the period of economic disturbances as during such period their activities are highly monitored by the auditors and the internal as well external stakeholders. Overall, it may be interpreted that a high degree of scrutiny and market acceptance of lowered performance during the period of financial crisis lead to a lower level of earnings management being practiced during the period of financial crisis.

However, certain studies (Latridis and Kadorinis, 2009; Persakis and Iatridis, 2015; Jahmani et al., 2016) have also presented that earnings quality decreases (earnings management increases) during the financial crisis which is contradictory to the results of our study. The conflicting results obtained here from can be ascribed to the observation that these findings are based on studies that were conducted on listed companies in advanced economies, while our research is in Turkish context which has been regarded as an emerging economy by IMF. This also brings us to the scope of further research in this context. In future, drawing from this research along with other research works done in the context of emerging economies, the researchers can try to establish a trend between these economies concerning the impact of financial crisis on Earnings Management. Such results can also be determined for the advanced economies which will enable generalization of results to all other economies that lack research within this domain.

Conclusion and Recommendation

This study acts as a facilitator to shed light on earnings management practices during times of crises and underlines the effects of such practices with respect to satisfying stockholder expectations and attracting potential investors. Owing to the disgrace brought about by certain companies in recent years, earnings management is a discipline which is now bestowed with tremendous attention of the general public and the decision-making authorities. Drawing from its growing importance, the present study examined the earnings management behaviour of Borsa Istanbul listed manufacturing companies from 2007 through 2012. The objective of the study had been to explore whether the earnings management behaviour had been unusual for these firms during the 2008 global financial crisis. The period under investigation was chosen to be 2007-2012 which was divided into 3 periods, i.e. 2007 and 2008 which was taken as the pre-crisis period, 2009 and 2010 was considered as the crisis period, and 2011 and 2012 was taken as the post-crisis period.

The observations of this study registered that the quality of accruals had risen sharply during the crisis period and therefore, there was a lower level of earnings management during the crisis period in Turkey. The presence of lower manipulation of earnings during the crisis period can be attributed to a number of reasons such as lower incentive for the management for manipulating the earnings, higher market acceptance towards lower performance by the firms and increased surveillance of government authorities, auditors and exchange boards during such periods of economic distress. It is quite obvious that the firms will refrain from earnings management activities when their activities are being extensively monitored.

This study also confirmed that the level of earnings management increased in the post-crisis period in Turkey. Such an increase may be attributed to the restricted behaviour that the management had to exhibit during the financial crisis period. As highlighted earlier, there are various incentives for the management to manipulate the earnings such as the investors using such information for making investment decisions, manipulation of real activities have a less chance of detection and very often, the pay of the management is linked with the performance of the firm. Hence, after a period of being restricted to manipulate the earnings during the crisis period, the managers tend to practice earnings management more in the post crisis period owing to the various motives associated with it.

Moreover, the present study has also identified the scope of further research in this context. It was found that the findings of the emerging economies and advanced economies differed with respect to the impact of financial crisis on earnings management. Also, there is a lack of studies enabling generalisation of the results of one economy to another. Therefore, taking inputs from this research along with other research works done relevant to the emerging economies, the researchers can try to establish a trend between these economies concerning the impact of financial crisis on Earnings Management.

Such a trend can also be determined for the advanced economies which will allow generalization of results to all other economies that lack study within this research area. Therefore, researchers can use this research gap to further develop studies that test the same variables in other countries based on categorical classification of the economies. Furthermore, earnings management being a glaring issue, its association with other variables such as profitability, economic performance, management board, audit committee, risk management and the like can also assess in further research works.

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