Influence of Economic Cycles on the Relationship of Earnings Management and Insolvency of Publicly Trailed Companies

Predebom, Bruna da Silva; Bianchi, Márcia; Machado, Vanessa Noguez

doi:10.15728/bbr.2020.0857.en

Tabla de contenido Anterior Actual Siguiente

Tabla de contenido

Article • BBR, Braz. Bus. Rev. 22 • 2025 • https://doi.org/10.15728/bbr.2020.0857.en linkcopy

Influence of Economic Cycles on the Relationship of Earnings Management and Insolvency of Publicly Trailed Companies

Authorship SCIMAGO INSTITUTIONS RANKINGS

The aim of this study is to analyze the influence of economic cycles on the relationship between earnings management and insolvency of publicly traded companies listed on the Brasil, Bolsa, Balcão (B3) stock exchange, from 2010 to 2019. For this purpose, the propensity for earnings management (the quality of discretionary accruals) among both insolvent and financially healthy companies, was analyzed during four phases of economic fluctuations based on variations in Gross Domestic Product (GDP)-expansion and recovery (high), and recession and contraction (low). Insolvency was examined by balance, cash flow, and by the propensity for corporate financial distress, treated by the Z-score. The results indicate that although there is a significant influence of insolvency on the propensity for earnings management, a higher level of insolvency would not necessarily increase earnings management through discretionary accruals. Furthermore, economic cycles influence the relationship between management and corporate insolvency differently, indicating greater influence in the analyzed relationship during periods of high economic activity.

Keywords:
Economic Cycles; Earnings Management; Insolvency

Criteria	Number of Firms	% of Population	% of Sample
Active companies listed on B3	415	100.0%	-
(-) Unavailable at Economatica	65	15.7%	-
(-) Financial sector	77	18.6%	-
(-) Cash flow inconsistencies	101	24.3%	-
(=) Sample	172	41.4%	-
Industrial goods	32	7.7%	18.6%
Communications	4	1.0%	2.3%
Cyclical consumption	50	12.0%	29.1%
Non-cyclical consumption	16	3.9%	9.3%
Basic materials	23	5.5%	13.4%
Oil. gas and biofuels	4	1.0%	2.3%
Health	9	2.2%	5.2%
Information Technology	2	0.5%	1.2%
Public utility	32	7.7%	18.6%

Variabbles		Sigla	Formula	M	Referência
Dependent	Discretionary Accrual	AC	Discretionary accruals using the Modified Jones model (JM) and Pae (2005) (Pae)	Quanto maior a dispersão dos accruals discricionários (desvio-padrão), maior tende a ser o GR	Dechow et al. (1995) and Pae (2005).
Independent of Interest	Insolvency by Balance	ISc	Variable continues when Shareholders' Equity, weighted by the company's total assets, is negative; and 0 otherwise	Quanto maior o valor, maior a insolvência por saldo (valor em módulo)	Adapted of Altman and Hotchkiss (2010) and Coelho et al. (2017).
	Insolvency by Flow	IFc	Continuous variable when there is a reduction of 30% or more in the share price compared to the previous year, and 0 otherwise	Quanto maior o valor, maior a insolvência por fluxo (valor em módulo)	Altman and Hotchkiss (2010) and Coelho et al. (2017).
	Insolvency by Z-score	Zscorec	Altman Z-score estimated for study reality based on logit regression.	Quanto maior o valor, maior a propensão à insolvência por Z-score	Altman et al. (1979).
	Economic Cycles	Ciclos	Classification for each stage of the cycles (Contraction, Expansion, Recession and Recovery)	Variáveis binárias para cada uma das 4 etapas (sendo 1 quando da sua ocorrência e 0 as demais)	Schumpeter (1939) and Paulo and Mota (2019).
Control	Size	TAM	Total Active log	Quanto maior o valor, maior o tamanho	Watts and Zimmerman (1990).
	Return on Assets	ROA	operating profit/total assets	Quanto maior o valor, maior o ROA	Bowen et al. (2008).
	Growth	CRE	Total assetsіᵢᵼ - Total assetsіᵢᵼ-₁/ Total assetsіᵢᵼ-₁	Quanto maior o valor, maior o crescimento	Nardi and Nakao (2009).

Variables		2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	Total
ACJM	Obs.	0	159	163	164	165	168	168	166	167	164	1484
	Mean	0	0.014	0.038	0.047	0.033	0.012	0.040	0.059	0.087	0.032	0.021
	Std. Dev.	0	0.077	0.112	0.066	0.058	0.060	0.054	0.090	0.720	0.072	0.255
	Min.	0	0.198	0.607	0.234	0.197	0.160	0.157	0.484	0.201	0.213	0.607
	Max.	0	0.123	0.117	0.096	0.072	0.125	0.081	0.068	4.647	0.104	4.647
ACPAE	Obs.	0	159	163	164	165	168	168	166	167	164	1484
	Mean	0	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000	0.000
	Std. Dev.	0	0.047	0.051	0.046	0.048	0.049	0.045	0.054	0.053	0.052	0.049
	Min.	0	-0.098	-0.135	-0.127	-0.134	-0.125	-0.097	-0.107	-0.159	-0.131	-0.159
	Max.	0	0.111	0.134	0.135	0.112	0.106	0.138	0.144	0.155	0.122	0.155
ISc	Obs.	172	172	172	172	172	172	172	172	172	172	1.720
	Mean	0.023	0.118	0.079	0.082	0.144	0.161	0.042	0.018	0.06	0.02	0.075
	Std. Dev.	0.092	0.182	0.163	0.165	0.197	0.202	0.125	0.085	0.144	0.085	0.158
	Min.	0	0	0	0	0	0	0	0	0	0	0
	Max.	0.439	0.439	0.439	0.439	0.439	0.439	0.439	0.439	0.439	0.439	0.439
IFc	Obs.	172	172	172	172	172	172	172	172	172	172	1.720
	Mean	0.015	0.016	0.017	0.018	0.02	0.026	0.032	0.035	0.035	0.035	0.025
	Std. Dev.	0.053	0.055	0.055	0.058	0.06	0.066	0.075	0.078	0.078	0.077	0.067
	Min.	0	0	0	0	0	0	0	0	0	0	0
	Max.	0.212	0.212	0.212	0.212	0.212	0.212	0.212	0.212	0.212	0.212	0.212
Zscorec	Obs.	172	172	172	172	172	172	172	171	172	171	1.718
	Mean	-1.998	-1.73	-1.708	-1.594	-1.389	-1.083	-1.226	-1.387	-1.414	-1.657	-1.519
	Std. Dev.	1.393	1.396	1.458	1.394	1.374	1.329	1.362	1.452	1.423	1.515	1.43
	Min.	-4.38	-4.38	-4.38	-4.38	-4.38	-4.38	-4.38	-4.38	-4.38	-4.38	-4.38
	Max.	0.498	0.498	0.498	0.498	0.498	0.498	0.498	0.498	0.498	0.498	0.498
ROA	Obs.	172	172	172	172	172	172	172	172	172	172	1.720
	Mean	4.004	2.594	1.78	1.845	0.957	-0.61	0.216	1.207	1.376	1.682	1.505
	Std. Dev.	6.438	6.861	7.372	7.157	7.261	7.641	7.481	7.535	8.083	7.152	7.388
	Min.	-13.675	-13.675	-13.675	-13.675	-13.675	-13.675	-13.675	-13.675	-13.675	-13.675	-13.675
	Max.	11.047	11.047	11.047	11.047	11.047	11.047	11.047	11.047	11.047	11.047	11.047
TAM	Obs.	172	172	172	172	172	172	172	172	172	172	1.720
	Mean	14.522	14.637	14.677	14.729	14.779	14.804	14.794	14.815	14.859	14.932	14.755
	Std. Dev.	1.478	1.485	1.507	1.499	1.528	1.56	1.564	1.589	1.601	1.621	1.544
	Min.	12.325	12.325	12.325	12.325	12.325	12.325	12.325	12.325	12.325	12.325	12.325
	Max.	17.21	17.21	17.21	17.21	17.21	17.21	17.21	17.21	17.21	17.21	17.21
CRE	Obs.	172	172	172	172	172	172	172	172	172	172	1.720
	Mean	0.184	0.111	0.073	0.064	0.064	0.068	0.009	0.035	0.065	0.088	0.076
	Std. Dev.	0.124	0.122	0.122	0.12	0.114	0.118	0.106	0.104	0.104	0.121	0.124
	Min.	-0.104	-0.104	-0.104	-0.104	-0.104	-0.104	-0.104	-0.104	-0.104	-0.104	-0.104
	Max.	0.301	0.301	0.301	0.301	0.301	0.301	0.301	0.301	0.301	0.301	0.301

Discricionary Accruals (AC)			General	Downturn		Upturn		Mann-Whitney by INS
Discricionary Accruals (AC)			General	Contraction	Recession	Expantion	Recovery	Mann-Whitney by INS
Jones Modificado
IS	No	Observations	1303	288	438	290	287	0.0000
		Mean	-0.0146	-0.0272	0.0174	-0.0437	-0.0214
		Standard Deviation	0.2685	0.0616	0.4507	0.0910	0.0562
		Kruskal-Wallis by cycle	0.012
	Yes	Observations	181	41	52	39	49
		Mean	-0.0651	-0.0703	-0.0585	-0.0844	-0.0524
		Standard Deviation	0.0991	0.0777	0.0803	0.1596	0.0651
		Kruskal-Wallis by cycle	0.669
IF	No	Observations	1199	265	388	292	254	0.0005
		Mean	-0.0184	-0.0278	0.0113	-0.0446	-0.0239
		Standard Deviation	0.2452	0.0650	0.4158	0.0947	0.0569
		Kruskal-Wallis by cycle	0.028
	Yes	Observations	285	64	102	37	82
		Mean	-0.0308	-0.0524	0.0018	-0.0798	-0.0323
		Standard Deviation	0.2907	0.0628	0.4713	0.1459	0.0631
		Kruskal-Wallis by cycle	0.246
Zscore	No	Observations	1361	302	458	303	298	0.0000
		Mean	-0.0149	-0.0281	0.0162	-0.0425	-0.0213
		Standard Deviation	0.263	0.063	0.441	0.090	0.055
		Kruskal-Wallis by cycle	0.016
	Yes	Observations	123	27	32	26	38
		Mean	-0.0855	-0.0831	-0.0878	-0.1194	-0.0621
		Standard Deviation	0.1046	0.0673	0.0711	0.1818	0.0701
		Kruskal-Wallis by cycle	0.618
*Pae*
IS	No	Observations	1303	288	438	290	287	0.0000
		Mean	0.0032	0.0044	0.0025	0.0012	0.0049
		Standard Deviation	0.0471	0.0468	0.0467	0.0504	0.0449
		Kruskal-Wallis by cycle	0.808
	Yes	Observations	181	41	52	39	49
		Mean	-0.0230	-0.0312	-0.0215	-0.0090	-0.0286
		Standard Deviation	0.0579	0.0577	0.0590	0.0653	0.0498
		Kruskal-Wallis by cycle	0.451
IF	No	Observations	1199	265	388	292	254	0.0000
		Mean	0.0032	0.0036	0.0032	0.0015	0.0046
		Standard Deviation	0.0485	0.0486	0.0483	0.0516	0.0453
		Kruskal-Wallis by cycle	0.995
	Yes	Observations	285	64	102	37	82
		Mean	-0.0133	-0.0147	-0.0121	-0.0121	-0.0141
		Standard Deviation	0.0504	0.0515	0.0483	0.0572	0.0499
		Kruskal-Wallis by cycle	0.898
Zscore	No	Observations	1361	302	458	303	298	0.0000
		Mean	0.0028	0.0035	0.0028	0.0011	0.0040
		Standard Deviation	0.0476	0.0480	0.0470	0.0505	0.0453
		Kruskal-Wallis by cycle	0.891
	Yes	Observations	123	27	32	26	38
		Mean	-0.0314	-0.0392	-0.0405	-0.0123	-0.0312
		Standard Deviation	0.0568	0.0513	0.0550	0.0710	0.0499
		Kruskal-Wallis by cycle	0.524

Variable	ACJM				ACPae
	Downturn		Upturn		Downturn		Upturn
	Con	Rece	Exp	Recu	Con	Rece	Exp	Recu
Constant	0.061	-0.548	0.170	-0.088	0.061	-0.185	-0.280	-0.276
ISc	0.000	0.009	-0.128	-0.029	0.004	-0.002	-0.043	-0.034^**
IFc	0.061	-0.643	-0.207	0.179	-0.008	-0.014	0.158^*	0.022
Zscorec	-0.018^{^*}	0.059	0.003	-0.013	-0.007	-0.017^**	0.002	-0.019^**
ROA	-0.001	0.017^*	0.003	0.002	0.001	0.000	0.002	0.001
TAM	-0.008	0.045	-0.014	0.004	-0.005	0.010	0.019	0.017
CRE	0.077	-0.569	0.068	0.099^**	0.069^*	0.075^**	0.063	0.023
FE by sector	Yes
FE by year	Yes
Observations	328	490	328	336	328	490	328	336
Firms	166	168	166	168	166	168	166	168
Ajusted R²	0.029	0.050	0.080	0.248	0.048	0.107	0.091	0.120
F test	1.576	2.448	2.894	9.100	1.540	5.537	3.686	7.097
Prob > F	0.0833 (^*)				0.0002 (^***)

Variables	ACJM					ACPae
	General	Downturn		Upturn		General	Downturn		Upturn
	General	Con	Rece	Exp	Recu	General	Con	Rece	Exp	Recu
Constant	-0.169	-0.173	-0.174	-0.17	-0.162	-0.150^*	-0.153^*	-0.149^*	-0.143^*	-0.145^*
ISc	-0.019	-0.007	-0.067	-0.005	-0.009	-0.01	-0.009	-0.015	-0.008	-0.009
IFc	-0.314^**	-0.347^**	-0.166	-0.378^**	-0.342^**	0.014	0.026	0.028	-0.024	0.023
Zscorec	0.007	0.007	0.005	0.006	0.008	-0.008^**	-0.009^**	-0.008^**	-0.008^**	-0.007^**
Ciclo		-0.02	0.018	-0.046	-0.031		0.006	0.002	0.005	0.004
ISc^*Ciclo		-0.053	0.126	-0.114^**	-0.04		-0.005	0.013	-0.018	-0.004
IFc^*Ciclo		0.188	-0.429^**	0.232	0.134		-0.064	-0.036	0.141^**	-0.025
Zscorec^*Ciclo		-0.002	0.004	0.000	-0.003		0.003	0.001	0.001	-0.005^***
ROA	0.006^*	0.006^*	0.006^*	0.006^*	0.006	0.001^**	0.001^**	0.001^**	0.001^***	0.001^**
TAM	0.012	0.012	0.011	0.011	0.011	0.009	0.009	0.008	0.008	0.008
CRE	-0.121	-0.123	-0.129	-0.121	-0.123	0.055^***	0.056^***	0.055^***	0.056^***	0.056^***
FE by sector	Yes					Yes
FE by year	Yes					Yes
Observations	1.482	1.482	1.482	1.482	1.482	1.482	1.482	1.482	1.482	1.482
Firms	168	168	168	168	168	168	168	168	168	168
Ajusted R²	0.032	0.030	0.033	0.031	0.030	0.067	0.067	0.066	0.073	0.072
F test	7.592	6.556	6.323	6.831	7.048	6.338	5.756	5.620	5.939	6.178
Prob > F	0.2103					0.0760 (^*)

location_on

Fucape Business School Av. Fernando Ferrari, 1358, Boa Vista, 29075-505, Vitória, Espírito Santo, Brasil, (27) 4009-4423 - Vitória - ES - Brazil
E-mail: bbronline@bbronline.com.br

rss_feed Acompañe los números de esta revista en su lector de RSS

[TFN1] Source: Prepared from different authors (2020).