Analisi empirica dell'earnings management nel mercato italiano

his study examines the relationship between a firm’s market value and earnings management in the Italian financial market. Change in total accruals is used as a proxy for earnings management and change in the market to book ratio is used as a proxy for a firm’s market value. In contrast to the United States, Italy is a code-law and insider system country. The financial accounting system is characterized by a close overlap with tax accounting systems, which allows me to study the relationship with a different perspective than is possible with U.S. data. Moreover, I imply change in total accruals to measure earnings management. To my knowledge, there are no studies utilising this methodology in this type of institutional setting. The results of my study show that an increase in a firm’s market value is associated with income-increasing earnings management and a decrease in a firm’s market value is associated with income-decreasing earnings management. In line with U.S. evidence, my findings empirically validate Jensen’s prediction (Jensen, 2005) of the overvalued company also in the Italian financial market. The positive relationship between a decrease in a firm’s market value and income-decreasing earnings management is consistent with Badertscher (2011) study. First, this study focuses on the Italian institutional setting, which differs from the U.S. one. The Italian industrial system is mainly characterized by a majority of small and medium-sized enterprises, most of them family-owned. As said before, the accounting system is different from the U.S. Due to the institutional context that characterizes Italian companies, the main goal of Italian accounting rules is the preservation of equity and a close overlap of tax accounting rules and financial accounting rules. Moreover, in countries like Italy, where the capital markets do not have a strong effect on companies and, as said before, the capital market does not represent the main sources of financing for the companies (as in the United States), one would think that managers will not be motivated to manipulate earnings upward. The evidence and potential results of the study could be relevant to understanding how managers play the earnings management “game”, considering how the capital market structure differs from the United States', and to demonstrate the importance of securities markets in order to protect investors’ interest. Thus, the Italian data allows us to study the relationship between a firm’s market value and earnings management. To my knowledge this is the first study that analyses the relationship between firms' market valuation and earnings management based on Italian data. Second, to test my hypotheses, I use the change in total accrual as a proxy for the earnings management. The change measure (total accrual in year t minus total accrual in year t-1) is a particularly strong test for earnings management. To be more precise, accruals are measured relative to a firm’s industry and represent the change in net operating assets that would be absent without discretionary earnings management. Thus, from an income statement point of view, a firm with positive total accruals in t-1, and a positive change in total accruals in year t, is increasing discretionary earnings management by an increasing amount. At the same time, firms with negative total accruals in t-1, and negative change in total accruals in year t, is decreasing discretionary earnings by a decreasing amount. The previous methodology allows us to detect income-increasing and income-decreasing earnings management phenomena respectively.