Earnings management incentives : are they the same for all private firms?

Purpose: This paper examines financial reporting incentives and behaviour among various private firm groups. The findings of prior research are mixed as to whether the managers of private firms make reporting choices that enhance earnings quality or just to minimize their tax burden. This study contributes a nuanced analysis of private firms' characteristics, motives, and accounting choices among the European Commission's recommended private firm classifications. Methodology: While most prior studies in this area consider private firms a homogeneous group, we divide our sample of 76,588 Italian private firms into four (and two) size categories and compare reporting incentives and behaviour, as documented by existing literature, between these groups. Findings: We find strong evidence of differences in reporting behaviour between firms of different groups. Contrary to expectations, tax minimization does not seem to be the dominating incentive, even for smaller private firms and loss

avoidance is prevalent in all groups. We find some evidence that larger firms try to build a reputation to respond to the demand for reporting quality from shortterm creditors and minority shareholders but the pressure from longterm debt providers seems to motivate managers to engage in opportunistic earnings management. We also find that smaller firms exhibit a more opportunistic reporting behaviour, although stakeholder pressures seem to affect them to a lower degree. Originality/value: These findings suggest that the diversity of private firms' characteristics and incentives should be taken into consideration in future research on private firms. In other words, earnings management incentives differ notably between private firms. [Publisher's text]