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Earnings Quality in a Bubble Period: The Case of Construction Activity Firms in Spain
Author(s) -
NavarroGarcía Juan Carlos,
MadridGuijarro Antonia
Publication year - 2017
Publication title -
australian accounting review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.551
H-Index - 36
eISSN - 1835-2561
pISSN - 1035-6908
DOI - 10.1111/auar.12139
Subject(s) - accrual , earnings , bubble , context (archaeology) , earnings quality , quality (philosophy) , business , earnings management , economic bubble , real estate , accounting , monetary economics , economics , labour economics , demographic economics , finance , paleontology , philosophy , epistemology , parallel computing , computer science , biology
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.