# Heads and Tails of Earnings Management: Quantitative Analysis in Emerging Countries

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## Abstract

**:**

## 1. Introduction

#### 1.1. Literature Review

#### 1.1.1. Graphic Modelling of Specific Accruals

#### 1.1.2. Mathematical Modelling of Specific Accruals

#### 1.1.3. Modelling of Total Discretionary Accruals with Application of Cross-Sectional Data

#### 1.1.4. Modelling Using Manipulation Score

#### 1.1.5. Cross-Sectional Earnings Analysis and Accrual Modelling

#### 1.1.6. Detection of Real Earnings Management

#### 1.1.7. Modelling Using Neural Networks

#### 1.1.8. Modelling of Total Discretionary Accruals with Application of Time Series

**H**There is a unit root for the series of EBIT. There is a significant existence of the earnings management._{A}.**H**The series of EBIT is not stationary. There is a significant existence of the earnings management._{B}.**H**The series of EBIT is heterogeneous. There is a significant change in the earnings management._{C}.**H**The series of EBIT is heterogeneous. There is a year of a significant change in the earnings management._{D}.

## 2. Materials and Methods

- (a)
- The amount of total assets is at least EUR 3,000,000;
- (b)
- The amount of total sales is at least EUR 2,000,000;
- (c)
- The amount of net income is minimally EUR 100,000.

_{o}of these tests (Leybourne et al. 1998). The test statistic of Dixon is defined as:

_{0}is that the series possesses a unit root and thus is not stationary. On the other hand, there are stationarity tests as the parametric Kwiatkowski–Phillips–Schmidt–Shin test or nonparametric Phillips–Perron test, for which H

_{0}is that the series is stationary. Standard Dickey–Fuller tests can have very low power and can lead to a very serious problem of spurious rejection of the unit root H

_{0}(Leybourne et al. 1998) and thus we support the tests by Kwiatkowski–Phillips–Schmidt–Shin test. Dickey and Fuller (1979) show three different equations to test the occurrence of unit root:

## 3. Results

#### 3.1. Pre-Processing of Data

#### 3.2. Testing of Assumptions

_{0}in Slovak case as well as in Bulgarian case, based on Table 4. It is not rejected based on Jarque–Bera test that the sample of EBIT of extracted Slovak and Bulgarian enterprises follows a normal distribution. The test of the randomness of the sampling process is running after proving the normality.

_{0}, based on Table 5. It is not rejected based on Box–Pierce test that the data of EBIT of Slovak enterprises, as well as Bulgarian enterprises, exhibit no serial correlation.

#### 3.3. Processing of Results

**H**There is no unit root for the series of EBIT. There is no significant existence of the earnings management._{1A}.

_{0A}, based on Table 6. It is not rejected following the Dickey–Fuller test of unit root for No intercept, Intercept, and Intercept + Trend, that there is a unit root for the series of EBIT. There is significant existence of the earnings management of Slovak and Bulgarian enterprises.

**H**The series of EBIT is not stationary. There is significant existence of the earnings management._{1B}.

_{0B}, and accept the alternative hypothesis H

_{1B}, based on Table 7. It is rejected following the KPSS test of stationarity for Level and Trend that the series of EBIT is stationary. These results confirm the conclusions of previous tests of no stationarity in managerial activities but significant managing earnings in Slovak and Bulgarian enterprises.

**H**The series of EBIT is heterogeneous. There is a significant change in the earnings management._{1C}.

_{0C}, and accept the alternative hypothesis H

_{1C}, based on Table 8. It is rejected following the von Neumann test of homogeneities of EBIT. Thus, there is a significant change in the earnings management of Slovak and Bulgarian enterprises.

## 4. Discussion

**H**The series of EBIT is heterogeneous. There is a year of a significant change in the earnings management._{1D}.

_{0D}, and accept the alternative hypothesis H

_{1D}, based on Table 9. It is rejected following the SNHT that no year of a significant change of EBIT does exist. Table 9 and Figure 3 and Figure 4 involve indicated year as well as indicated central mean lines of development. The year 2014 is the year of significant change in the earnings management of Slovak and Bulgarian enterprises. This year divides the development of EBIT and determines the individual central line. The difference between calculated central lines of EBIT of Bulgarian and Slovak enterprises is not very noticeable. It is EUR 92,000 until 2014 and EUR 110,000 since 2014. The finding also confirms some parallel of these emerging economies.

## 5. Conclusions

## Author Contributions

## Funding

## Acknowledgments

## Conflicts of Interest

## References

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**Figure 3.**Significant change in the earnings management of Slovak enterprises. Source: own research.

**Figure 4.**Significant change in the earnings management of Bulgarian enterprises. Source: own research.

Samples | Slovakia | Bulgaria |
---|---|---|

Origin | 1347 | 1839 |

Missing values | 189 | 358 |

Outliers | 69 | 60 |

Final | 1089 | 1421 |

Year | Observed Value | Critical Value | p-Value (Two-Tailed) | Alpha | |||
---|---|---|---|---|---|---|---|

Slovakia | Bulgaria | Slovakia | Bulgaria | Slovakia | Bulgaria | ||

2010 | 0.621 | 0.447 | 0.174 | 0.168 | <0.0001 | <0.0001 | 0.05 |

2011 | 0.272 | 0.597 | 0.174 | 0.168 | <0.0001 | <0.0001 | 0.05 |

2012 | 0.491 | 0.205 | 0.174 | 0.168 | <0.0001 | <0.012 | 0.05 |

2013 | 0.273 | 0.411 | 0.174 | 0.168 | <0.0001 | <0.0001 | 0.05 |

2014 | 0.715 | 0.290 | 0.174 | 0.168 | <0.0001 | 0.0002 | 0.05 |

2015 | 0.611 | 0.434 | 0.174 | 0.168 | <0.0001 | <0.0001 | 0.05 |

2016 | 0.639 | 0.241 | 0.174 | 0.168 | <0.0001 | <0.003 | 0.05 |

2017 | 0.809 | 0.540 | 0.174 | 0.168 | <0.0001 | <0.0001 | 0.05 |

2018 | 0.668 | 0.248 | 0.174 | 0.168 | <0.0001 | 0.002 | 0.05 |

Year | Slovakia [Thousand €] | Bulgaria [Thousand €] |
---|---|---|

2010 | 826.304 | 809.544 |

2011 | 849.407 | 903.255 |

2012 | 832.338 | 987.599 |

2013 | 891.055 | 1042.889 |

2014 | 1074.256 | 1189.924 |

2015 | 1247.988 | 1391.023 |

2016 | 1359.095 | 1437.167 |

2017 | 1438.782 | 1543.163 |

2018 | 1444.950 | 1561.801 |

Jarque–Bera Test | Slovakia | Bulgaria |
---|---|---|

JB (Observed value) | 1.119 | 0.884 |

JB (Critical value) | 5.991 | 5.991 |

DF | 2 | 2 |

p-value (Two-tailed) | 0.572 | 0.643 |

alpha | 0.05 | 0.05 |

Box–Pierce Test | Slovakia | Bulgaria |
---|---|---|

DF | 6 | 6 |

Q | 11.172 | 9.630 |

p-value (Two-tailed) | 0.083 | 0.141 |

alpha | 0.05 | 0.05 |

Dickey–Fuller Test | Observed Value | Critical Value | p-Value (One-Tailed) | Alpha | |||
---|---|---|---|---|---|---|---|

Slovakia | Bulgaria | Slovakia | Bulgaria | Slovakia | Bulgaria | ||

No intercept | 2.788 | 3.724 | −1.965 | −1.965 | 0.993 | 0.998 | 0.05 |

Intercept | 0.007 | −0.699 | −3.353 | −3.353 | 0.932 | 0.792 | 0.05 |

Intercept + Trend | −1.843 | −1.620 | −4.230 | −4.230 | 0.588 | 0.688 | 0.05 |

KPSS Test | Observed Value | Critical Value | p-Value (One-Tailed) | Alpha | |||
---|---|---|---|---|---|---|---|

Slovakia | Bulgaria | Slovakia | Bulgaria | Slovakia | Bulgaria | ||

Level | 0.893 | 0.912 | 0.459 | 0.459 | <0.0001 | <0.0001 | 0.05 |

Trend | 0.939 | 0.967 | 0.149 | 0.149 | 0.007 | 0.002 | 0.05 |

von Neumann’s Test | Slovakia | Bulgaria |
---|---|---|

N | 0.151 | 0.145 |

p-value (Two-tailed) | <0.0001 | <0.0001 |

alpha | 0.05 | 0.05 |

SNHT Test | Slovakia | Bulgaria |
---|---|---|

T_{0} | 7.053 | 6.732 |

t (year of significant change) | 2014 | 2014 |

mu_{1} [thousand €] | 895 | 987 |

mu_{2} [thousand €] | 1373 | 1483 |

p-value (Two-tailed) | 0.008 | 0.008 |

alpha | 0.05 | 0.05 |

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**MDPI and ACS Style**

Durana, P.; Valaskova, K.; Chlebikova, D.; Krastev, V.; Atanasova, I.
Heads and Tails of Earnings Management: Quantitative Analysis in Emerging Countries. *Risks* **2020**, *8*, 57.
https://doi.org/10.3390/risks8020057

**AMA Style**

Durana P, Valaskova K, Chlebikova D, Krastev V, Atanasova I.
Heads and Tails of Earnings Management: Quantitative Analysis in Emerging Countries. *Risks*. 2020; 8(2):57.
https://doi.org/10.3390/risks8020057

**Chicago/Turabian Style**

Durana, Pavol, Katarina Valaskova, Darina Chlebikova, Vladislav Krastev, and Irina Atanasova.
2020. "Heads and Tails of Earnings Management: Quantitative Analysis in Emerging Countries" *Risks* 8, no. 2: 57.
https://doi.org/10.3390/risks8020057