Earnings Management in the Financial Crisis 2007/2008 : Evidence from German-Speaking Countries

We investigate the financial crisis's impact on earnings management behavior in the German-origin banking sector during the financial crisis 2007/2008. Controlling for similar institutional settings and company differences, we use four different earnings management measures (discretionary loan loss provisions, small gains/great losses, market to book ratio and an aggregate ranking index) in accordance with prior literature and find an increase in earnings management during the crisis. Using a relatively small data sample allows us to analyze earnings management on the individual company level and therefore we are able to reveal differences among the observed firms. Earnings management is found to be used with balance sheet as well as income statement items and is additionally driven by company size, the role of equity markets for firm financing and the fragmentation of shareholders. Overall, the results indicate a decrease in the informativeness of earnings for market participants.
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