The Consolidation Trap: Empirical Evidence from Differences in Earnings Management Incentives and Practices in Brazil

Advances in Scientific and Applied Accounting. São Paulo, v.6, n.2, p. 137-155, 2013

22 Pages Posted: 27 Jul 2015

See all articles by Jose Elias Feres de Almeida

Jose Elias Feres de Almeida

Federal University of Espirito Santo (UFES)

Guillermo Braunbeck

University of São Paulo (USP)

Fernanda Furuta

Insper Institute of Education and Research

Nelson Carvalho

FEA-USP

Date Written: October 07, 2013

Abstract

This paper investigates a particular scenario under the Brazilian Generally Accepted Accounting Principles before IFRS adoption, which require public companies to disclose individual financial statements (legal parent entity), together with consolidated financial statements (economic entity). Notwithstanding, different incentives for earnings management can be identified in comparing legal and economic entities and their respective financial statements. We use two models of earnings management, Jones Modified with 848 observations and KS with 694 observations for the same period 2000 to 2006. This research shows certain evidence on income-decreasing expense accounting choices in legal entities financial statements, consistent with the hypothesis of management for lowering tax burden. Whereas, evidence from economic entity (consolidate accounting figures) suggests income-increasing accounting choices, consistent with the political cost and capital market pressure hypotheses. These results can contributes to understand the real impact of legal system in firms accounting in Brazil, since the disclosure requirement for individual and consolidated financial statements is mandatory for few countries around the world.

Keywords: Consolidation, Earnings Management, Accounting Choices, Legal system, Taxation

JEL Classification: D78, G18, G38, H20, H25, H30, K22, K34, K42, M40, M41, M49

Suggested Citation

Almeida, Jose Elias Feres de and Braunbeck, Guillermo and Furuta, Fernanda and Carvalho, Nelson, The Consolidation Trap: Empirical Evidence from Differences in Earnings Management Incentives and Practices in Brazil (October 07, 2013). Advances in Scientific and Applied Accounting. São Paulo, v.6, n.2, p. 137-155, 2013, Available at SSRN: https://ssrn.com/abstract=2635922

Jose Elias Feres de Almeida (Contact Author)

Federal University of Espirito Santo (UFES) ( email )

Av. Fernando Ferrari, n. 514, Goiabeiras
Centro de Ciências Jurídicas e Econômicas
Vitoria, Espírito Santo 29075-910
Brazil
+5527992248737 (Phone)

Guillermo Braunbeck

University of São Paulo (USP) ( email )

Ave Prof Luciano Gualberto 908
São Paulo 05508-010
Brazil

Fernanda Furuta

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

Nelson Carvalho

FEA-USP ( email )

Av. Prof. Luciano Gualberto 908
São Paulo SP, São Paulo 05508-900
Brazil

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