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Earnings Quality in a Bubble Period: The Case of Construction Activity Firms in Spain

Earnings Quality in a Bubble Period: The Case of Construction Activity Firms in Spain 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Australian Accounting Review Wiley

Earnings Quality in a Bubble Period: The Case of Construction Activity Firms in Spain

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Publisher
Wiley
Copyright
Copyright © 2017 CPA Australia Ltd (CPA Australia)
ISSN
1035-6908
eISSN
1835-2561
DOI
10.1111/auar.12139
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

Australian Accounting Review – Wiley

Published: Jun 1, 2017

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