The model developed in Section 4.5.1 is a linear model. The assumptions of a linear regression are that each of the independent variables has a linear relationship with the dependent variable, the residuals of the regression are normally distributed, and there is no heteroscedasticity and no serial correlation of the residuals. To detect non-normally distributed residuals and heteroscedasticity, robust regressions were run in STATA (Tables 4 and 5, Appendix).
As can be seen from Table 4.6, the variable used to capture the effect of the IAS/IFRS adoption (IAS) was statistically significant at the 10% level and negatively related to the dependent variable when accruals were calculated following the balance sheet method. This result implies that Greek companies tended to use fewer discretionary accruals after the adoption of IAS/IFRS as a way of managing earnings. In other words, the result indicates that the adoption of IAS/IFRS was significantly correlated with lower levels of earnings management, or as Ismail et al. (2010, p. 19) put it: “the level of reported earnings‟ departure from normal earnings is lower after the adoption of the new standard, suggesting that earnings quality is higher after the adoption of IFRS”. Table 4.7 shows that IAS/IFRS adoption lowered earnings management even when accruals were calculated through the cash flow method, indicating that the result is robust to the use of alternative methodology for calculating the absolute value of discretionary accruals. Therefore, the coefficient of the dummy variable used for the adoption of IAS/IFRS (IAS) revealed a negative relationship that was statistically significant at the 5% level between IAS/IFRS adoption and accruals.
DACCBS t-stat IAS -0.047 -1.92* Size -0.076 -1.74* Leverage -0.002 -0.26 Ocf 0.218 2.05** first 0.290 1.22 second -0.080 -1.30 third -0.018 -0.14 fourth -0.147 -1.40 fifth 0.002 0.34 sixth -0.011 -0.21 seventh 0.075 1.76* eighth 0.344 1.61 ninth 0.067 1.68* tenth 0.036 0.69 eleventh -0.133 -1.21 twelfth 0.099 1.72* thirteenth -0.010 -0.41 Constant 0.166 2.48*** R2 0.195 P Value 0.0388 N= 1448
Table 4.6: Regression results
Note:DACCBS are the absolute discretionary accruals calculated
based on the balance sheet method, IAS is a dummy variable coded 1 when numbers are reported under IAS/IFRS and 0 otherwise, Size is the measured by the natural logarithm of total assets, Leverage is measured by the total debt to total assets,
Ocf is the operating cash flows, first, second, thritd, fourth, fifth, sixth, seventh, eighth, ninth, tenth, eleventh, twelfth, thirteenth
are the dummies used for the industry classification.
*,**,*** indicate significance at the 10%, 5% and 1% level respectively.
This result is in line with that of Barth et al. (2008), who also found that the adoption of IAS/IFRS was related to lower levels of earnings management, as well as that of Renders and Gaeremynck (2007), who found that earnings management and IAS/IFRS adoption were negatively related. The result also agrees with that of Iatridis and
Rouvolis (2010), who, using four metrics as proxies for earnings management, found that Greek companies reported higher levels of earnings management before IAS/IFRS adoption than after their adoption.
DACCCF t-stat IAS -0.035 -2.00** Size -0.021 -2.05** Leverage -0.000 -0.15 Ocf 0.018 2.25** first -0.026 -1.17 second -0.005 -0.88 third 0.036 1.44 fourth 0.009 0.48 fifth -0.001 -0.08 sixth 0.003 0.37 seventh 0.015 1.60 eighth 0.029 0.62 ninth -0.008 -0.94 tenth -0.027 -1.69* eleventh 0.018 1.36 twelfth 0.004 0.43 thirteenth 0.002 0.31 Constant -0.171 -2.45*** R2 0.1457 P Value 0.000 N=1448
Table 4.7: Regression results
Note: DACCCF are the absolute discretionary accruals
calculated using the cash flow method. The rest of the variables have been defined in table 4.5.
*,**,*** indicate significance at the 10%, 5% and 1% level respectively.
Size was negatively related to accruals and statistically significant at the 10% level when accruals were calculated following the balance sheet method, and statistically significant at the 5% level when accruals were calculated using the cash flow method. These results imply that small Greek companies tended to use more accruals than large
Greek companies. As mentioned in Section 4.5.1, this negative relationship is attributed to the differing political attention paid to large and small companies. Large companies used fewer discretionary accruals because the government was likely to inspect large companies more often than small companies; therefore, large companies tended to avoid managing their earnings as part of their accounting practices. The results are in line with those of Van Tendeloo and Vanstraelen (2005), who found that the size of German companies and the use of accruals were negatively related. It also agrees with the findings of Tsipouridou and Spathis (2012), who investigated the use of earnings management in Greece and found that size and accruals were negatively related.
The negative relationship between leverage and accruals (Table 4.5 and Table 4.6) indicates that Greek companies that reported high levels of leverage used fewer discretionary accruals than companies that reported low levels of leverage. The result supports the contractual renegotiations hypothesis, according to which companies that report high leverage ratios may manage their earnings less in view of contractual renegotiations. Although this relationship was found to be insignificant, the result agrees with those of Van Tendeloo and Vanstraelen (2005) and Watts and Zimmerman (1990), who argue that size and accruals are negatively related. It is also in line with that of Goncharov and Zimmerman (2006), who investigated the effect of IAS/IFRS adoption on earnings management in Germany and found that leverage and accruals were negatively related but that the relationship was insignificant.
As can be seen from Tables 4.6 and 4.7, accruals and operating cash flows (Ocf) were found to be positively related, and the relationship was statistically significant at the level of 5% irrespective of the method followed for the calculation of accruals (balance sheet or cash flow method). The positive relationship between the abovementioned variables can be attributed to the fact that high levels of accruals (either income- increasing or income-decreasing) were reported in the annual reports of companies facing extreme financial performance. The result is in line with that of Van Tendeloo and Vanstraelen (2005) and indicates that companies that report high operating cash flows use more accruals as part of their creative accounting practices.