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Housing bubbles may result in deep crises that affect all economic systems. This study investigates how the recent housing bubble in Spain has affected earnings quality during the whole bubble. To this end, we use data on mostly private construction activity firms in Spain, that is, construction and real estate companies. Earnings quality is studied by means of the predictive ability of earnings, conservatism, discretionary accruals and real earnings management. The results indicate a progressive decrease in the quality of financial reporting as the bubble develops, as managers try to conceal an underlying downward trend. We further show that earnings quality continues to decline even after the bubble bursts. Overall, this contribution, together with those of other environments, may suggest that, in a bubble context, we have to take care of firms’ earnings quality even some years before the crisis comes to the fore.
Australian Accounting Review – Wiley
Published: Jun 1, 2017
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