Impact of COVID-19 Pandemic on Earnings Management: An Evidence from Financial Reporting in European Firms

The aim of this study is to determine the impact of COVID-19 pandemic on earnings management practices. Focusing on a sample of 2,031 firms listed in 15 European countries, the study uses three discretionary accrual metrics as a proxy for earnings management (Dechow et al., 1995; Kothari et al., 2005; McNichols, 2002) models. To this end, ordinary least squares (OLS) regressions are applied to compare earnings management during the pre-pandemic period (2017q1-2019q4) and the pandemic period (2020q1-2020q4). The results indicate that the sample firms tend to manage earnings during the pandemic period than during the preceding period. This finding implies a reduced reliability of the financial reports during the COVID-19 pandemic. Further analysis provides evidence of significant income-increasing earnings management during 2020. This finding suggests that firms manage earnings upward by alleviating the level of reported losses to rebuild investor and stakeholder confidence needed to support the economic recovery.