Earnings management and industry classification in Brazil: An exploratory investigation

Enron and Worldcom accounting scandals brought new attention over the quality of financial accounting reports produced by listed corporations. Earnings management has generally been considered as the main cause of the alleged decrease in earnings relevance over the last decades (Lev, 1989). Following this line of inquiry this paper investigates earnings management activities of Brazilian firms. Prior research suggests that industrial organization can play a relevant role in motivating earnings management practices. To take this effect into account we control for industry classification using Economatica's 20 sector definition excluding financial services, banks, insurance, and agribusiness. Our earnings management metric is based on the Kang and Sivaramakrishnan (1995) model. Results are only statistically significant for four sectors suggesting that industry classification does not explain the variance in earnings management activities for the selected sample. This output is not consistent with the stated hypothesis. Our findings contribute to the recent debate among practitioners, regulators and academics about the determinants of earnings management practices and accounting quality.