The Value Relevance of Earnings Management in Manufacturing Industries before and during the Financial Crisis

This paper empirically investigates the value relevance of reported earnings during the period 2006-2011 for 193 firms (excluding banks and insurance companies) listed in the Milan Stock Exchange, representing about 91.28% of the stock exchange capitalisation (30 April 2012). The objective of the paper is to analyze: a) the value relevance of earnings, cash flow from operations, discretionary and non-discretionary accruals; b) the effect of Global Financial Crisis on the value relevance of accounting information. The paper contributes to examine different components of earnings and to filling a gap extending the analysis to the financial crisis. To test our hypotheses first, we determined the accruals by applying specific models proposed in the international literature, such as the Jones (1991) model and its subsequent amendments; second, we analysed the value relevance of earnings, cash flow and accruals basing the analysis on Ohlson (1995) model, extensively used in previous value relevance researches. The findings show that cash flow from operations, discretionary and non-discretionary accruals have different value relevance. In addition, the results describe the reduction of value relevance during the economic and financial crisis