Earnings Management Strategies during Financial Difficulties : A Comparison between Listed and Unlisted French Companies

This paper investigates and compares the earnings management strategies of listed and unlisted firms during situations involving financial difficulties. The evidence from a sample of 6,407 French non-financial entities from 2009 to 2016 shows that, in the presence of severe financial problems, both listed and unlisted entities exhibit income-increasing earnings manipulation carried out through real activities rather than discretionary accruals. The findings consistently reveal a more extensive use of income-increasing earnings management behaviours among listed firms compared to unlisted entities, especially in the presence of high levels of indebtedness. Thus, they provide full support for the “opportunistic behaviour” hypothesis about the earnings management behaviours of listed firms, at least in the context where firms are highly dependent on external debt and the institutional setting does not provide strong protection to creditors. Finally, the results indicate that, under such circumstances, entities trade off earnings manipulation strategies and define earnings management behaviours based on the probability of being detected, rather than looking at the cost of such earnings management tools