The effect of financial crisis on earnings quality - international evidence on changes in earnings quality during the global financial crisis around 2008-2010

RESEARCH OBJECTIVES: The objective of this thesis was to research, whether the financial crisis at the end of the first decade of the current millennium had an effect on the quality of reported earnings. The focus is in the direction of changes in earnings quality during the financial crisis. Additionally, differences between geographical areas are in the interest of this thesis. DATA AND METHODOLOGY: The final sample of this thesis consists of 37 countries. The data was retrieved from Thomson One Banker Worldscope -database, and it includes the public companies listed in the main stock exchange of each country. Earnings quality was measured with two different methods: an aggregate measure of earnings management and a model based on discretionary accruals. The research questions were analyzed using SPSS software by applying repeated measures analysis of variance test, paired samples t-test and Friedman test. RESULTS: While the findings of this thesis are not univocal, the analysis gives some statistically significant results. The majority of the findings is related to the sample of Europe. However, the evidence is mixed. On one hand, the results give some support to decreased earnings quality during the global financial crisis. On the other hand, indications of improved earnings quality during the Eurozone crisis are also found. The results do not clearly reveal, whether earnings quality normalizes post-crisis. The geographical area affects the changes in earnings quality during the financial crisis