Do firms in revitalization engage in earnings management: The Portuguese case.

Inês Lisboa


Purpose: This paper analyses earnings management of firms in revitalization. We aim to verify differences in discretionary accruals between firms that are still in activity and the others. Moreover, we study which determinants impact earnings management and if results depend on the firm’ situation.

Methodology: The sample covers Portuguese firms that enter in 2012 in the special revitalization program. The sample period covers the period from 2011 till 2017. First the Kothari et al. (2005) model was used to calculate discretionary accruals. Then, we propose a model with seven determinants to explain earnings management.

Findings: Results show that distress firms engage in earnings management. Firms that are still in activity use upward accruals strategy, while firms that went to bankruptcy use downward one. Moreover, determinants related with leverage, return, the sign of net income, size and age are relevant to explain earnings management of firms that went to bankruptcy. To solvent firms, only age is statistically significant to explain discretionary accrual. Finally, we show that more than half of the firms that look for this program went to failure in the years after.

Practical implications: Our work giver relevant information to the government about the revitalization program success. Moreover, it calls attention for the need of legislation to limit earnings management to demotivate firms to engage in these practices.

Originality: Studies analyzing the impact of revitalization programs in earnings management are scarce, and the existing ones only analyze differences before and after solvency problems.


Earnings Management; Accruals; Revitalization; Insolvency; Portugal

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