Does public/private status affect the level of earnings management in code-law contexts outside the United States? A study based on the Spanish case

This study analyzes the difference in earnings quality between public and private firms in Spain. We go beyond the income-increasing incentives on which the United States debate has been exclusively based and build on previous Belgian results by considering institutional differences and differences in the type of blockholder and by proposing a new income-smoothing methodology.No significant differences are found for income smoothers and increasers except for those included in the Spanish Ibex 35 index, which show lower manipulation levels due to the predominance of supervision over market pressure. Higher levels of income decreasing are found for private companies. We attribute this to the expropriation practiced by public firms through real activities in their relationship with the banks, which leads to a lower need to engage in downwards manipulation.