Management's means and incentives to manage earnings: an integrated study in the Italian market

This paper provides a methodological contribution to existing research on earnings management. In this context, purpose of our analysis is to understand, through introduction of qualitative variables, how financial performance threshold values (Burgstahler and Dichev, 1997) results in manipulation and creates an incentive for managerial behaviour. The study demonstrates that provisions for liabilities and charges, the assets impairment loss and net deferred tax liability are de facto used to manage earnings. If a firm has a profit (or loss) in year t, it has a tendency to positively (or negatively) manage earnings in same year. Furthermore, starting situation plays a significant role since it becomes a relevant threshold for adoption of earnings management policies. In spite of significance of thresholds considered, their impact on single components analysed is moderate. Moreover, financial crisis was not neutral as regards earnings management.