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Essays in SME earnings management

Huang, X. (2021) Essays in SME earnings management. PhD thesis, University of Reading

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To link to this item DOI: 10.48683/1926.00098539

Abstract/Summary

This thesis includes three empirical studies in earnings management using EU samples. A large number of studies on earnings management focus on listed and/or large firms, which leaves Small and Mediumsized Enterprises (SMEs), especially European SMEs, understudied. However, SMEs play a vital role in the development of the EU’s economy. They are also more informationally opaque and less creditworthy compared to large enterprises, which could lead to more incentives in earnings management around debt financing. Existing literature that explores SME earnings management substantially focuses on firm-level determinants. Though bank finance is the dominant external source of finance for European SMEs, the banking effects on SME earnings management are rarely explored due to limited data availability. Thus, using unique matched data on SME-bank relationships in EU countries, the first study of the thesis investigates the external effectsfrom the banking market competition perspective. The main results show supporting evidence to the existence of a positive effect of bank market power on SME earnings management. The results also show that the positive effect is more pronounced for SMEs that are smaller-sized, more liquidity-constrained, or have fewer growth opportunities. The second study of the thesis focuses on another external aspect of earnings management determinants, which is country-level lending infrastructure. The comprehensive framework of country-level characteristics is derived from Berger and Udell (2006)1 which includes information, legal, social and regulatory environments. The results in this study show that SME earnings management is more prevalent in countries that have better credit information sharing, more effective legal systems, higher stock of social capital, and more stringent regulatory environments. After examining the external influence of bank market power and lending infrastructure on SME earnings management, the third study of the thesis explores the effects of SME earnings management at firm-level. Specifically, since financial constraint is one of the most serious problems faced by EU SMEs, the third study sheds light on the effect of SME earnings management on its cost of bank credit. In the setting of a less financially constrained SME sample, the main finding suggests that the SME’s extent of earnings management is negatively associated with its cost of debt. In sum, the empirical evidence in this thesis jointly contributes to the current earnings management literature and related policy-making by expanding the understanding of the European SME earnings management behaviours and raising attention to enhance the quality of monitoring mechanisms.

Item Type:Thesis (PhD)
Thesis Supervisor:Han, L. and Yang, J.
Thesis/Report Department:Business Informatics, Systems and Accounting
Identification Number/DOI:https://doi.org/10.48683/1926.00098539
Divisions:Henley Business School > Business Informatics, Systems and Accounting
ID Code:98539

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