engleski

USING BENFORD'S LAW TO DETECT EARNINGS MANAGEMENT PRACTICE: THE CASE OF LISTED COMPANIES IN CROATIA

The aim of the study is to investigate whether managers at Croatian capital market round earnings numbers to achieve key cognitive reference points represented by Nx10k. Following previous studies (Thomas (1989), Van Caneghem (2002), Kinnunen and Koskela (2003), Skousen at al (2004), Guan at al (2006)), we test for the rounding behavior by comparing observed and expected (i.e. estimated using Benford's law) frequencies for the second digits of positive and negative earnings numbers. The analysis employs 4.986 positive quarterly earnings observations and 4.030 negative quarterly earnings observations for publicly listed Croatian companies from year 2000 to year 2006. Contrary to our expectations, we could not find significant small upward rounding of profits from just below Nx10k (second digit nine) to just above (second digit zero) Nx10k. However, we did find more nines than expected in the second place of negative earnings numbers for total sample, but we did not document any significant decreases in zeros. Potential explanations for these results can be connected with specific characteristics of institutional settings.

Benford's law; cosmetic earnings management; digital analysis

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