Detecting Earnings Management: a Study of German Public Companies During the Global Financial Crisis 2008

This study investigates the accounting decisions made by managers of German public companies during the financial crisis of 2008. The overall goal was to detect the usage of earnings management strategies. The list of incentives for earnings management during the financial crisis was elaborated, among which were income-increasing as well as income-decreasing and smoothing strategies. The earnings management was detected in the event year (2008 or 2009 depending on the industry) and the year preceding the crisis. Big-bath accounting was the most preferable earnings management strategy in a year -1. For the year 0 mixed evidence was gathered. Discretional accruals turned out to be different within the same industry (except Automobile). Asset quality index, gross margin index and industry belonging was proved to have a positive correlation with the probability of earnings manipulation.