Does size matter? A comparative study of earnings management across small, medium, large private and publicly listed companies in the UK

Rozic, Ivana (2021) Does size matter? A comparative study of earnings management across small, medium, large private and publicly listed companies in the UK. (PhD thesis), Kingston University, .


The accounting regulation in the United Kingdom (UK) classifies firms into private (small, medium-sized, and large private firms) and publicly listed companies (PLCs). Evidence of earnings management in PLCs is plentiful, yet there is scant evidence in private firms. This thesis investigates the degree of earnings management for small, medium, and large private firms, compared to PLCs in the UK given the distinctive features of private firms and limited evidence about their earnings management practices. This thesis considers the implications of private firms’ specific characteristics that may be associated with their earnings manipulation practices. Specifically, the effects of regulatory size, ownership structure (i.e., controlling interest and ownership dispersion), different accounting standards, capital structure (i.e., leverage levels) and the audit effect across differently sized private firms. Data for this thesis have been collected using FAME database for the period 2005 to 2018. A combination of the frequency distribution of reported earnings, changes in earnings, and the discretionary accruals have been used in the data analysis to investigate differences across the different classes of firms. The empirical evidence shows that private firms manipulate earnings to a greater extent than PLCs. The small private firms have the highest level of earnings management, followed by large and medium private firms. It has been revealed that subsidiaries of PLCs may have contributed to the lower level of earnings management amongst PLCs. Specifically, earnings manipulation within private subsidiaries of PLCs is greater than in stand-alone private firms. The influence of ownership concentration on earnings management level is supported by the findings. Private firms with more dispersed ownership exhibit less manipulation than private firms with concentrated ownership. The analysis based on private firms also suggests that the adoption of International Financial Reporting Standards (IFRS) allows greater discretion than Generally Accepted Accounting Practice in the UK (UK GAAP). The higher level of leverage clearly intensifies the opportunistic behaviour of private firms more profoundly than PLCs. The effectiveness of audits on constraining earnings management is reduced in small private firms compared to medium and large private firms. The findings of this thesis contribute not only to the current discussion on earnings management in private firms versus PLCs but provide an important opportunity to advance the understanding of financial reporting practices in private firms across different sizes in the UK. This thesis contributes to earnings management research by demonstrating how various characteristics of private firms affect the level of earnings manipulation.

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