Earnings Management in Private Swedish Companies -A Study of the Contributing Factors

Background and problem: Due to a large number of accounting scandals the academic term earnings management has become more known to the world in recent years, which has lead to an increased demand for further research on this subject. The research questions of this thesis are the following; To what extent do private limited companies in Sweden manage their earnings? How do the following factors affect the existence of earnings management in private limited Swedish companies; industry, debt to equity ratio and choice of audit firm? Purpose: To inform the reader on the existence of earnings management in private limited companies in Sweden and what can affect its existence by analyzing more than 45 000 observations through a population study. Also, this thesis serves to add to the previous fairly vague research in the private sector area and to create awareness for all stakeholders about these problems. Limitations: This population study will examine 5 341 private limited Swedish companies with complete financial information for the years 2005-2013. Only financial information from Business Retriever will be analyzed and not individual financial reports. Method: The method and tests will be based on the earnings distribution method presented by Hayn (1995) and Burgstahler and Dichev (1997), by analyzing the distribution of earnings in the positive area of a weighted net income of zero through the main test. Thereafter a sub test will analyze the association of the previously mentioned chosen factors with the existence of earnings management. Results and conclusion: The main results show an irregular distribution of earnings among the companies analyzed around zero, implying that these companies manage their earnings to overcome losses due to several reasons. We have found evidence that these companies are associated with specific industries and the usage of a not Big Four audit firm. No relation between these companies and their respective level of debt to equity has been found. Proposal for future research: We propose future research to be made in the area by evaluating the correlation between industry size and significance, evaluate the correlation between earnings 4 management and audit firm on an individual level (EY, Deloitte, KPMG, PWC) and on the relation between earnings management and level of debt to equity by using the second as a binary variable