Corporate accruals quality during the 2008–2010 Global Financial Crisis

This study investigates the earnings quality (measured by accruals quality) of European firms during the 2008–2010 financial crisis. Prior literature suggests that the quality of earnings would be low during the crisis. However, we found that the accounting standards-setting bodies and regulators of the capital market showed great concern regarding financial reporting policy, so we expected that there would be strong incentives for firms to improve earnings quality during an economic recession. In the present study, we compare the earnings quality of sample firms in 14 European countries during the 2005–2007 period and during the financial crisis period (2008–2010) and find that the sample firms tended to present higher-quality financial reports during the financial crisis than prior to it. This finding suggests that reduced investor confidence and market liquidity engendered by the financial crisis motivated management to strategically enhance earnings quality in an attempt to increase investor confidence and reduce the negative impact of the economic recession. Our results are robust after taking into account other firm- and country-level factors that may affect earnings management incentives and behavior.