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JAEE
13,4 Earnings management during
the COVID-19 crisis: evidence
from the Brazilian and American
760 capital markets
Received 8 October 2021 Eduardo da Silva Flores
Revised 25 May 2022
Accepted 12 January 2023 USP, S~ao Paulo, Brazil
Joelson Oliveira Sampaio
FGV-EESP, Sao Paulo, Brazil
Aziz Xavier Beiruth
Department of Accounting, FUCAPE, Vitoria, Brazil, and
Talles Vianna Brugni
FUCAPE, Vitoria, Brazil

Abstract
Purpose – The main purpose of this study is to evaluate whether the COVID-19 pandemic has stimulated
earnings management among publicly traded companies in Brazil and the USA.
Design/methodology/approach – The authors analyzed the above-mentioned effects based on 22,244
observations of Brazilian companies and 139,856 observations of American companies from 1998 to 2020.
The proxy used to detect earnings management based on discretionary accruals (DAC) was obtained by
using the Modified Jones Model (MJM) (Dechow et al., 1995), with adjustments suggested by Kothari et al.
(2005). In accordance with previous studies (e.g. Brown et al., 2015; Enomoto et al., 2015; Galdi et al., 2020;
Huang and Sun, 2017; Roychowdhury, 2006), the authors also employed a second proxy to detect earnings
management through real activities associated with unusual losses for fixed assets (property, plant and
equipment (PPE)).
Findings – The study’s findings indicate that the discretionary accruals of Brazilian companies varied in a
more accentuated manner during the COVID-19 pandemic, making it possible to deduce that a recent history of
economic depression may entail greater incentives for earnings management in an emerging economy.
In addition, the authors verified that the effects of the current crisis on earnings management proxies denote a
signal that is distinct from previous economic crises, which may be interpreted as an attempt to postpone the
effects of the pandemic on financial statements, especially those of the Brazilian capital markets.
Originality/value – Unlike previous crises, this pandemic has led to direct restrictions on a wide variety of
economic segments rather than indirect contagion due to anomalies in the financial markets, making it a
phenomenon with the characteristics of a quasi-natural experiment for studies related to the quality
of accounting information. Considering that both Brazil and the USA provide an opportune economic contrast,
given their discrepancies in terms of economic growth over the past two decades, the researchers believe that
there is an unusual opportunity to understand how earnings management can be an incentive for managers in
environments where crises arose from natural causes.
Keywords COVID-19, Earnings management, Economic crises, Brazil, United States
Paper type Research paper

1. Introduction
The main purpose of this research is to evaluate the earnings management practices during the
COVID-19 pandemic in the Brazilian and American capital markets. Although previous studies
Journal of Accounting in Emerging
Economies
have demonstrated that earnings management occurs with greater frequency during economic
Vol. 13 No. 4, 2023 crises (e.g. Choi et al., 2011; Filip and Raffournier, 2014; Flores et al., 2016), they do not indicate
pp. 760-783
© Emerald Publishing Limited
2042-1168
DOI 10.1108/JAEE-10-2021-0317 JEL Classification — M41, M42, M48, M49
whether economic trends can affect this tendency during moments of crisis or whether this Earnings
effect has a distinct magnitude in emerging economies as compared to developed ones. management
In comparing earnings management practices in developed and developing countries,
without adding the effects of economic crises, Lin and Wu (2014) point out that more
during
developed markets, in general, have a larger number of regulatory mechanisms, greater COVID-19 crisis
disclosure and greater creditor and shareholder rights. The results of Yu’s study (2008)
reveals that companies that are subjected to greater market monitoring experience a lower
level of earnings management, highlighting another positive point for developed markets in 761
relation to the quality of accounting information in these countries, given that there is greater
coverage by analysts and shareholders.
Likewise, previous that which have sought to evaluate the effects of economic crises on
accounting information have analyzed financial crises that have indirectly affected real
economy firms (e.g. Achim et al., 2010; Barth and Landsman, 2010; Buga et al., 2010;
Davis-Friday and Gordon, 2005; Herrmann et al., 2008; Johl et al., 2007; Masood et al., 2010;
Scorte et al., 2009), but have not analyzed an event like the COVID-19 pandemic, which has
directly affected companies through restrictions imposed on them to combat the spread of the
pandemic.
An additional attribute that differentiates this study from others that have evaluated
potential earnings management practices during periods of crisis stems from the fact that the
COVID-19 pandemic has affected nations in a reasonably similar manner, causing the closing
of commerce and restrictions on industrial production, culminating in a reduction in economic
activities in terms of supply and demand. Given this scenario, there have been demands for
governmental authorities to formulate stimulus plans so that their citizens can remain at
home and companies can remain solvent during this period. These facts can be understood as
the creation of a quasi-natural event, in the style of studies by Campbell et al. (2010) and
Lennox and Pittman (2011), or even as an exogenous shock for accounting choices made by
publicly traded firms.
However, if the effects of the COVID-19 crisis can be interpreted as an exogenous shock of
similar proportions to the global economic system, the fact remains that different countries
have not faced equal economic conditions and trajectories in combating this shock.
According to The Economist (2020) “emerging economies will feel the impact of the pandemic
for longer than advanced economies,” especially due to their history of social inequality and
poverty and the lower margins with which emerging governments must work in terms of
making fiscal policy adjustments.
Topcu and Gulal (2020) emphasize that despite the COVID-19 pandemic having gained
more accentuated contours since March 2020, the fact remains that we know little about how
it has empirically affected companies in emerging markets.
The preceding context could be surmised for the two countries on which this study focuses,
because while the American Congress approved more than three trillion dollars to battle the
COVID-19 pandemic (Zurcher, 2021), Brazilian authorities approved an economic stimulus
package of roughly 150 billion dollars to deal with the adversity caused by COVID-19 in Brazil
(KPMG, 2020). Naturally, the Brazilian economy is considerably smaller than the American
economy. However, according to data from the World Health Organization (WHO) (2021), the
USA and Brazil, respectively, lead the world in terms of the largest number of infections and
deaths caused by this disease, even during this paper’s development.
However, if Brazil and the USA are close in terms of the COVID-19 numbers based on
WHO data (2021), they are markedly different if we compare their economic tracks during the
past few years. According to information from the Organisation for Economic Co-operation
and Development (OECD) (2021), the Brazilian economy shrank 1.07% in terms of gross
domestic product (GDP) from 2015 to 2020, while the American economy grew by 1.47%,
indicating opposite economic paths.
JAEE To develop our analyses, we used two proxies to detect potential earnings management
13,4 practices. The first proxy consists of the discretionary accruals (DAC) obtained from the
Modified Jones Model (MJM) in accordance with Dechow et al. (1995), with adjustments
suggested by Kothari et al. (2005). The use of this proxy was realized in order to capture the
synthesis of the accounting choices made by these companies based on the aggregate
accrual model.
The second proxy employed was the size of variation in the property, plant and equipment
762 (PPE) accounts. The main reason for the use of this second metric is associated with the
search for earnings management practices through real activities—real earnings
management (e.g. Brown et al., 2015; Huang and Sun, 2017; Roychowdhury, 2006)—as well
as the fact that some associations, such as the International Federation of Accountants (Gould
and Arnold, 2020), for example, warn of the need to evaluate the risk of misalignments with
the operational and financial conditions of these companies that may be using the COVID-19
crisis to lower their share prices that, even before this event, indicated that the values invested
in them may not be recovered.
The findings suggest that publicly traded Brazilian firms may engage in more earnings
management than do American firms. These results remained consistent when both
mentioned proxies were used as well as when more robust approaches, such as sample
matching through propensity score matching (PSM) as part of a difference in differences
(DiD) approach, were applied.
We can consider these findings as an indication that companies in emerging markets,
buffeted by the sinking paths of economic development indicators (e.g. GDP), are more likely
to practice earnings management during the COVID-19 crisis than are organizations based in
more established economies.
Within the context of the principal conclusions of this study, we can deduce that
accounting information is used as micro-data of public interest in the formulation of economic
and social policies, above all, during periods of crisis (e.g. Deninson and Williams, 2015;
Graves and Radcliffe, 2004; Trombetta, 2019). However, governmental authorities need to
understand that data from financial statements during periods of economic anomalies may be
biased so that organizations achieve goals of particular interest to them such as securing
financing with lower interest rates based on governmental subsidies (Crouzet and Tourre,
2020), by posting losses from underperforming investments that should have been recorded
in previous years (Laskaridou and Athanasios, 2013).
In addition, it has been reported that accounting information is used as a base for decision
making involving the allocation of resources (e.g. Akerlof, 1970; Bruns, 1968; Burchell et al.,
1980; Dragulescu et al., 2014; Jensen and Meckling, 1976; Wilson, 1953). However, during
moments of economic restrictions, users of this accounting information must be careful with
these numbers, given that they may contain procedural choices that are not strictly aligned
with the interests of the quality of accounting information. Similarly, auditors, analysts
and standard setters, among other business gatekeepers (Coffee, 2006), should pay increased
attention so that accounting procedures are not used to provide a veneer of misleading
information under cover of the COVID-19 crisis.

2. Literature review and development of the hypotheses

2.1 Accounting information and economic crises
During economic crises, it is usual for capital markets researchers, standard setters and
regulators to rely on financial statements to evaluate whether it is possible to forecast
business cycles (Davis-Friday and Gordon, 2005).
Within this context, the development of studies that seek to evaluate the qualitative
statistics of accounting information during periods of crisis reveal an important academic
concern related to the utility of financial statements during economic recessions. In the Earnings
following paragraphs, we will review a few examples of studies on accounting during crises. management
Musvoto (2011) evaluated the impact of the financial crisis of 2008 on accounting evaluations
and the development of financial theory. Masood et al. (2010) discussed the importance of
during
accounting regulations in terms of the financial industry, seeking to prevent problems such as COVID-19 crisis
those observed during the Subprime crisis. Buga et al. (2010) analyzed the importance of external
auditing to provide economic stability during the American mortgage crisis.
Barth and Landsman (2010), meanwhile, discussed how financial statements could have 763
helped in the identification of the beginning of the financial crisis in the USA in 2008,
especially how accounting through the concept of fair value could have improved the
informational value of financial reports. Scorte et al. (2009) discussed the importance of
financial statements during economic crises highlighting the relevance of accounting
regulation to increase informational evidence. Hermann et al. (2008) studied the impact of the
Asian crisis in 1997 on the conservative approach of corporate financial statements.
Davis-Friday and Gordon (2005) investigated the informational power of accounting
statements during the Mexican crisis of 1994.

2.2 Earnings management and economic crises

If, on the one hand, it is possible to perceive a proliferation of accounting research that seeks
to analyze how the information provided by financial reports affects and is affected by times
of economic crisis, on the other hand, there is no widespread literature mapping how financial
crises can create opportunities for earnings management practices, despite moments of this
nature being able to accentuate the incentives for this type of management (Watts and
Zimmermam, 1978). Some scarce examples of such literature are listed below.
Eng et al. (2019) highlighted results that indicate how earnings management differs between
American and Chinese family businesses. In the USA, earnings management through real
activities occurs to a greater extent post-crisis while in China the results are the opposite.
Flores et al. (2016) point out that, during periods of financial crisis in Brazil and the USA,
companies are motivated to practice earnings management. However, they do not indicate in
which country this occurs to a greater extent, or whether earnings management practices
follow the same direction or head in opposing ones (e.g. big bath accounting, taking a bath
accounting, income smoothing).
Although Filip and Raffournier (2014) expected that earnings management would be
greater during periods of economic stress, they found contrary results based on a database
for European countries, which signaled a decrease in earnings management during years of
financial crisis.
Han and Wang (1998) verified the use of earnings management in the American petroleum
industry in an attempt to reduce taxes during the Gulf War. To a certain extent, this result is
similar to the findings of Jones (1991), which revealed that American firms managed their
numbers during the oil crisis in the beginning of the 1990s in order to avoid becoming the
object of tax sanctions.
Even though there is some signaling that less earnings management is expected of publicly
traded companies in more developed capital markets, above all, due to the robustness of
corporate governance mechanisms (Biddle et al., 2009; Lin and Wu, 2014; Yu, 2008), there are no
studies that evaluate the propensity for earnings management during periods of economic
crisis, focusing on countries with distinct economic paths such as Brazil and the USA.

2.3 COVID-19 crisis and emerging economies

Since the 1990s, Brazil and the USA have traversed different economic paths. The distinctness
of their paths has become more accentuated over the past decade. From 2009 to 2019 while
JAEE American GDP per capita grew at an average 2% annually, Brazil’s GDP decreased and only
13,4 returned to a value close to zero in 2018 and 2019, as can be seen from Figure 1.
There were a few significant events that occurred between 2011 and 2020 as Brazil’s
economic results diverged markedly from that of the USA. This period witnessed the end of
the commodities boom, the impeachment of President Dilma, a severe domestic crisis in 2015
and 2016, and the COVID-19 pandemic in 2020. As a result, Brazil slipped eight positions in
the world ranking of GDP per capita, with its lead over other emerging countries diminishing
764 significantly, according to World Economic Outlook (2021).
The inconsistency demonstrated by the Brazilian economy suggests greater exposure to
the effects of the COVID-19 pandemic. A large portion of the measures adopted to face this
crisis, such as social distancing, impose restrictions on the full functioning of business
relationships (Altig et al., 2020), which have further complicated issues facing the emerging
Brazilian economy.
Djankov and Panizza (2020) point out that emerging countries have been more exposed to
economic losses from the COVID-19 crisis because they have: (1) a history of high levels of
poverty and inequality; (2) many informal workers and employees in small companies; (3) a
smaller range of work that can be performed at home; (4) limited capacity for tax policy
adjustments; and (5) precarious access to international financial markets.
Cakmakli et al. (2020) emphasized that companies based in emerging economies usually
require a larger scale of resources from international creditors and investors, as one of the
common traits of such economies is the low rate of domestic savings, which forces
organizations to finance their projects using resources from foreign investors. Therefore,
with greater limits on access to foreign capital, firms based in emerging countries tend to be
more affected than their counterparts in developed economies.
Harron and Rizvi (2020) found that emerging capital markets suffered severe reductions in
liquidity as the number of COVID-19 cases increased, indicating that the liquidity crisis may
be worse in emerging countries due to the historical high risk of making such investments.

2.4 Earnings management during the COVID-19 crisis in emerging economies

As mentioned earlier, the accounting choices made by companies based in emerging
economies may be more susceptible to earnings management during the COVID-19 period
due to the economies’ structural fragilities. These fragilities can be analyzed based on the
motivations for earnings management established by Watts and Zimmermam (1978).

Figure 1.
GDP per capita
(Annual %)
Since governments have less margin for tax adjustments in emerging economies (Djankov Earnings
and Panizza, 2020), companies tend to manage their earnings to avoid higher taxes during the management
COVID-19 pandemic (e.g. Amidu et al., 2019; Desai and Dharmapala, 2009; Iskandar et al.,
2005; Jones, 1991; Kaldonski and Jewartowski, 2020). This behavior has to do with earnings
during
management linked to political costs based on Watts and Zimmermam’s (1978) hypothesis. COVID-19 crisis
Because companies based in underdeveloped countries are more dependent on resources
from foreign investors (Cakmakli et al., 2020), there will be a greater incentive for earnings
management in order to avoid breaking contractual covenants during the COVID-19 765
crisis (e.g. Chan and Gao, 2014; Duh et al., 2015; Liang, 2004; Pappas et al., 2019). This may be
explained by contractual reasons for earnings management, which correspond with Watts
and Zimmermam’s formulation (1978).
Thus, it is possible to establish that economic crises heighten the potential for earnings
management motives as established by Watts and Zimmermam (1978). In addition, the
COVID-19 crisis may particularly accentuate the incentives for earnings management in
emerging economies. Following the prior literature, we propose the first hypothesis:
H1. Earnings management practices through discretionary accruals have been more
accentuated in Brazil than in the USA during the COVID-19 crisis.
It is noteworthy that the COVID-19 pandemic has represented a deviation from the
expectations for the Brazilian economy. According to Reuters (2019), at the end of 2019, a
return of growth was expected because there had been few occasions that had united such
favorable conditions for the implementation of the administrative, policy and tax reforms
necessary to attract foreign investment in Brazil.
This frustrating scenario caused by COVID-19 may have generated at least unexpected
accounting implications for some Brazilian firms, more specifically in terms of the
impairment test foreseen by IAS 36, to which Brazilian companies have been subjected since
2010 due to the convergence toward International Financial Reporting Standards (IFRS).
Flores et al. (2016) stated that the Brazilian economy has a markedly cyclical feature, a
statement corroborated by the recent trend in GDP per capita displayed in Figure 1. Thus, it is
possible that some companies during the recent Brazilian crisis have in not posted losses from
impairment because of their expectations of economic growth beginning in 2020. These
expectations, however, have been postponed due to the COVID-19 pandemic.
Laskaridou and Athanasios (2013) analyzed the use of subjectivity inherent in performing the
impairment test in terms of earnings management in Greece’s emerging economy. They concluded
that losses due to impairment signaled a lack of a temporal link in terms of their concretization,
which suggests that these losses should have been registered before they, in fact, were.
Thus, it is possible to conjecture that Brazilian companies that seek to post losses due to
underperforming shares, considering the impairment test features, may feel compelled to
make these entries because they cannot foresee conditions to postpone these losses from 2020.
In addition, they may seek to take advantage of the justification of the COVID-19 economic
crisis to derecognize bad assets, which should have been registered as expenses in the years
leading up to the pandemic. Given this, we present our second hypothesis:
H2. Decreases in PPE have been greater in publicly traded Brazilian companies than in
American companies during the COVID-19 crisis.
This second hypothesis can be better understood from the perspective of the “taking a bath”
accounting concept. According to Scott (2005), it is an earnings management practice that
occurs more frequently during periods of stress or a reorganization of society. Because
companies have to report losses under specific conditions, managers opt to present the greatest
loss possible so that future quarters do not give back part of the accruals that led to these
current losses, thereby increasing their chances of further realizing profits.
JAEE Considering this concept (Scott, 2005), interpreted in light of Roychowdhury’s definition
13,4 (2006) of real earnings management, it is possible to suppose that organizations have greater
incentives to post underperforming losses during the COVID-19 crisis so that the reversion of
these impairments in the future will give them a greater chance of reporting profits.

766 3. Methodology
3.1 Sample
The databases used in this study consist of information from Thomson Reuters. Initially we
collected information on publicly traded Brazilian and American companies from 1998 to
2020. We then eliminated companies that did not present consistent data for at least three
years. In addition, in order to mitigate biases due to outliers, all the variables were winsorized
using percentages of 0.5 and 99.5.
According to Topcu and Gulal (2020), the main economic effects of the COVID-19
pandemic were first witnessed in March 2020. Therefore, we used quarterly information to
capture the implications of the COVID-19 crisis in terms of earnings management by our
sample companies.
Giroux (2011) notes that quarterly information in archival research should be used when a
given event cannot be captured through the use of annual data. That being said, the final
sample considers information based on 22,244 and 139,856 firm observations in Brazil and
the USA, respectively.

3.2 Measurement of accrual-based earnings management

The proxy used to detect earnings management based on DAC was obtained by using the
MJM (Dechow et al., 1995), with adjustments suggested by Kothari et al. (2005), as represented
in Equation (1).
TAi;t ΔREVCi;t PPEi;t
¼ β0 þ β1 INVATi;t þ β2 þ β3 þ β4 ROAi;t þ εi;t : (1)
Ai;t−1 Ai;t−1 Ai;t−1

where: TAit represents the total accruals of firm i in quarter t, deflated by total assets in
quarter t–1; Ait1 represents the total assets of firm i in quarter t–1, and INVATit, ΔREVCit,
PPEit and ROAit, represent, respectively (for firm i in quarter t), the inverse of total assets, the
difference between the changes in gross revenue and the changes in accounts receivable
(ΔREVit  ΔRECit), fixed assets, and the return on assets (ROA as a proxy for the firm
performance control variable).
For the Brazilian sample we inserted an additional control variable IFRSit due to Brazil’s
partial adoption of the IFRS in 2008 and its full adoption in 2010. This variable is a time
dummy variable that is equal to zero for the quarters before 2008 and equal to one for the
quarters beginning in 2008 to mitigate the effects caused by the Brazilian market’s adoption
of international financial reporting norms.
Beginning with the base assumption that the MJM explanatory variables are less
susceptible to earnings management, we concluded that the appropriate error term for
Equation (1) represents DAC as measures of earnings management.
DACi;t ≡ εi;t : (2)

The MJM has been used as a reference for a wide array of studies on earnings management
practices (e.g. Ali et al., 2011; Bartov et al., 2001; Chen et al., 2020; Choi et al., 2011; Dechow et al.,
1995, 2003; Espahbodi et al., 2022; Flores et al., 2016; Garel et al., 2021; Jones et al., 2008; Jones,
1991; Li et al., 2020; McNichols, 2000; Othman and Zeghal, 2006).
3.3 Measurement of real earnings management Earnings
In accordance with previous studies (e.g. Brown et al., 2015; Enomoto et al., 2015; Galdi et al., 2021; management
Huang and Sun, 2017; Roychowdhury, 2006), we employed a second proxy to detect
earnings management through real activities associated with unusual losses for fixed
during
assets (PPE). COVID-19 crisis
According to Roychowdhury (2006), real earnings management is typically characterized
by atypical movements within the context of individual accounting positions, such as,
impairments of fixed assets. Thus, the metric for real earnings management in this study was 767
established by variations in PPE, as illustrated below.

PPEi;t PPEi;t−1
ΔPPEi;t ¼  : (3)
Ai;t−1 Ai;t−1

where ΔPPEit refers to the variation in balances for PPE accounts between each quarter for
each company, weighted by total outdated assets per quarter.

3.4 Models
The general model to test Hypothesis 1 is presented in Equation (4).
X
n
DACi;t ¼ β0 þ β1 Covid19i;t þ β2 Crisesi;t þ β3 ROAi;t þ β4 BTMi;t þ β5 Industryj
j¼1

X
n
þ β6 Quartersk þ ωi;t : (4)
k¼1

where DACit represents DAC obtained through Equation (1), Covid19it is the main
variable of interest of this study and represents a dummy time variable that is zero before
the crisis and assumes a value of one beginning in March 2020 (Topcu and Gulal, 2020);
Crises is a dummy variable that assumes a value of one during periods of economic
adversity that affected Brazil and the USA in previous quarters (Achim et al., 2010; Flores
et al., 2016; Gobbi and Merleverde, 2000; Krugman, 2009; Moore and Baker, 2008); the
variable ROA denotes the return on assets in order to mitigate heterogeneities due to the
size of these organizations (Jones et al., 2008; McNichols, 2000); BTM represents the ratio
between the accounting and market values of companies using the inherent adjustment to
discrepancies generated by the market values of firms (Howard et al., 2019; Jones et al.,
2008; McNichols, 2000); and the items Industry and Quarters represent fixed-effect
controls.
As occurred with Equation (1), we considered an additional dummy variable for
the Brazilian company sample to control for the adoption of the IFRS in Brazil beginning
in 2008.
To test Hypothesis 2, we employed the model below.
X
n
ΔPPEi;t ¼ β0 þ β1 Covid19i;t þ β2 Crisesi;t þ β3 ROAi;t þ β4 BTMi;t þ β5 Industryj
j¼1

X
n
þ β6 Quartersk þ ωi;t : (5)
k¼1

The main distinction of the model in Equation (5) is the dependent variable characterized by
ΔPPEit , which is a proxy for real earnings management (Roychowdhury, 2006).
JAEE 3.5 Design of the robustness tests
13,4 Because the COVID-19 pandemic has been an exogenous shock that has affected these
countries in a reasonably similar manner, we opted to use robustness tests based on the DiD
approach, in accordance with the recommendations of Goodman-Bacon (2021).
Bertomeu et al. (2016) claimed that the application of DiD modeling is considered a quasi-
natural experimental method—particularly appropriate for situations characterized by an
event that is exogenous to the company shares that have been affected. Various studies
768 have concluded that the COVID-19 pandemic represents an external shock to companies
(e.g. Azarova and Mier, 2021; Song et al., 2020; Venetoklis, 2021).
Following an approach similar to the DiD models employed by Campbell et al. (2010) and
Lennox and Pittman (2011), which are specifically oriented toward accounting aspects, we
developed Equations (6) and (7) wherein the variable Treatmentit is a dummy that receives a
value of zero for American firms and one for Brazilian firms, as displayed below.
DACit ¼ β0 þ β1 Treatmenti;t þ β2 Covid19i;t þ β3 Treatmenti;t * Covid19i;t þ β4 IFRSi;t
Xn X n
þ β5 ROAi;t þ β6 BTMi;t þ β7 Crisesi;t þ β8 Industryj þ β9 Quartersk þ ωi;t :
j¼1 k¼1

(6)
ΔPPEi;t ¼ β0 þ β1 Treatmenti;t þ β2 Covid19i;t þ β3 Treatmenti;t * Covid19i;t þ β4 IFRSi;t
Xn X n
þ β5 ROAi;t þ β6 BTMi;t þ β7 Crisesi;t þ β8 Industryj þ β9 Quartersk
j¼1 k¼1

þ ωi;t :
(7)

The term Treatmenti;t * Covid19i;t denotes the interaction between two different dummies for
the DiD model. Treatmenti;t is equal to zero for American firms and one for Brazilian firms,
while Covid19i;t is equal to zero before March 2020 and one after.
In order to give the DiD models greater reliability, we used the PSM technique following
Rosenbaum and Rubin’s instructions (1983). The utilization of PSM in studies that involve
accounting subjects has been gaining ground in recent years (e.g. Fleischer et al., 2017;
Franzen and Weißenberger, 2018; Hong et al., 2018), especially in terms of creating
subsamples with common characteristics between the treatment and control groups.
The parameters for deciding which companies were treated with PSM and which were not
included industry (the two-digit Standard Industrial Classification code), size, whose proxy
was the natural logarithm of total assets with a caliper of 0.001 for the neighbor approach, and
quarter, taking into consideration the quarter ending in March 2020—the period when the
economic crisis caused by COVID-19 came to the fore (Topcu and Gulal, 2020).

4. Results
4.1 Descriptive statistics
Figure 2 depicts the evolution of the dependent variables DACi;t and ΔPPEi;t over time,
comparing the percentage variations in GDP in Brazil and the USA.
Analyzing the greatest variations of aggregated DAC in a combined fashion, it is possible
to conjecture that the Subprime crisis between 2007 and 2009 can explain the greatest
variations in these two series. While GDP decreased sharply during this period, earnings
management as measured by DAC increased substantially.
 Brazil United States Earnings
0.04
management

DAC annual average%

0.00
DAC annual average%
0.02
0.00 during
–0.02 –0.05 COVID-19 crisis
–0.04
–0.06 –0.10
0.3

∆PPE annual average%

∆PPE annual average%

0.3 769
0.2
0.2
0.1
0.1

0.0 0.0
GDP Annual Growth%

GDP Annual Growth%

5
2

0
0
Figure 2.
–2
Descriptive among
trends of earnings
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 management proxies
Year Year
and GDP
Source(s): Prepared by the authors based on data from the World Bank (2021)

In the Brazilian capital markets, the proxies of earnings management occur simultaneously
with a drop in GDP. The increase in DAC occurred from 2005 to 2010 during the American
mortgage crisis. However, in the case of the American capital markets, the discretionary
accumulations suffered a notable variation during this five-year window after the advent of
the Subprime crisis. In other words, this drop of roughly 4% occurred between 2005 and 2010,
and the variation of 0.10 in terms of DAC occurred between 2010 and 2015.
The analysis of the term DAC and the variation in GDP for Brazil and the USA highlights
the economic differences between the two countries as noted by previous authors
(e.g. Cakmakli et al., 2020; Djankov and Panizza, 2020; Harron and Rizvi, 2020). The
Brazilian economy is substantially smaller and more concentrated than the US economy. Due
to less concentrated industries, there may be incentives to anticipate potential earnings
management practices in periods of crises to further specific company interests, such as,
posting losses due to underperforming shares and access to more favorable financing, among
other possibilities proposed in the earnings management literature (e.g. Scott, 2005; Watts
and Zimmermam, 1978).
Otherwise, considering the fact that the USA possesses one of the largest capital markets in
the world, the coverage of analysts and other gatekeepers, which is particularly accentuated
during periods of economic crises, may reduce opportunities to use heterodox accounting
procedures because companies are under greater scrutiny and subject to greater criticism by
users of financial statements. Yu (2008) presented revealed that companies covered by a larger
number of capital market analysts are less likely to employ management earnings practices.
In relation to the proxy for real earnings management ΔPPEi;t, it may be concluded that its
positive variation is more accentuated during periods in which GDP is growing. This result is
predictable to a certain extent because improvements in the economic scenario cause
companies to invest more in PPE assets (Rensburg and Vuuren, 2020).
Table 1 presents the main descriptive statistics for the samples. The information has been
normalized in terms of the monetary unit, being collected in US dollars, for a more homogeneous
comparison.
Tables 2 and 3 verify that the earnings management proxies indicate statistically significant
associations with the explanatory variable Covid19, which represents the period after
JAEE Variables Mean Std. Dev. N
13,4
Panel A – Brazilian Firms. The number of observations (N) refers to firm-year observations
INVAT 0.001 0.000 22,244
ΔREVC=Ait−1 0.008 0.451 22,244
PPE=Ait−1 0.203 0.276 22,244
ROA 7.795 62.369 22,244
770 IFRS 0.168 0.374 22,244
BTM 2.289 15.031 22,244
Covid19 0.018 0.134 22,244
Crises 0.053 0.225 22,244
DAC 0.002 0.153 22,244
ΔPPE 0.081 0.139 22,244
TA 0.084 0.207 22,244
Panel B – American firms
INVAT 0.001 0.001 139,856
ΔREVC=Ait−1 0.003 0.139 139,856
PPE=Ait−1 0.071 0.346 139,856
ROA 0.015 0.661 139,856
Table 1. BTM 88.681 18.703 139,856
Descriptive statistics Covid19 0.024 0.154 139,856
related to the sample Crises 0.232 0.422 139,856
composition of DAC 0.000 0.106 139,856
Brazilian and US firm- ΔPPE 0.029 0.961 139,856
observations TA 0.015 0.111 139,856

March 2020. This result can be considered a statistically significant association rather than a
variation, given that the DAC as well as the PPE variations display distinctly different behavior
during the year 2020 as compared to previous quarters. These results are in keeping with our
initial conjectures.
Other variables reveal statistical significance in a wide variety of associated results in
Tables 2 and 3, corroborating the relevance of their use in terms of controlling for sample
differences in the same way as previous studies involving the analysis of earnings
management practices in specific situations of economic crises have done (e.g. Eng et al., 2019;
Flores et al., 2016; Othman and Zeghal, 2006).

4.2 Main results and interpretations for discretionary accruals

Tables 4 and 5 demonstrate that earnings management practices through DAC varied in a
statistically abnormal fashion during the COVID-19 economic crisis.
The analysis of the Covid19 term of interest indicates that this variable is statistically
significant for the sample of Brazilian companies for all the tests performed based on the
model used in Equation (4), culminating with an estimated coefficient of 0.041, which was
significant at a level of 1% (Table 4). Meanwhile, even though the Covid19 variable was
shown to be significant for all the control variables (0.014) for American companies, it was not
statistically significant in the previous versions of the model (Table 5).
This result indicates that earnings management practices have been greater for Brazilian
than for American companies during the COVID-19 economic crisis. This result corresponds
with the literature, which reveals that the effects of the COVID-19 pandemic have been more
severe for emerging than for developed countries (e.g. Harron and Rizvi, 2020).
The effect of greater earnings management during the COVID-19 crisis in Brazil can also
be attributed to Brazil’s economic instability in recent years. Flores et al. (2016) pointed out
 1 2 3 4 5 6 7 8 9 10 11

1 – INVAT – 0.005* 0.085* 0.105* 0.039* 0.035* 0.020* 0.035 0.043 0.443* 0.173*
2 – ΔREV/Ait1 0.088* – 0.025* 0.017 0.003 0.003 0.081* 0.073* 0.006 0.201* 0.031*
3 – PPE/Ait1 0.194* 0.068* – 0.048* 0.026* 0.074* 0.071* 0.154* 0.004 0.681 0.352*
4 – ROA 0.101* 0.093* 0.607* – 0.014* 0.017* 0.003 0.027* 0.028* 0.642* 0.012*
5 – BTM 0.270* 0.070* 0.109* 0.197* – 0.004 0.003 0.026* 0.030* 0.152 0.049*
6 – IFRS 0.022* 0.013* 0.070* 0.811* 0.080* – 0.061 0.168 0.017 0.09* 0.077
7 – Covid19 0.054* 0.114* 0.079* 0.088* 0.016* 0.061* – 0.035* 0.044* 0.115* 0.089*
8 – Crises 0.074* 0.097* 0.196* 0.256* 0.090* 0.156* 0.033* – 0.063* 0.279* 0.160*
9 – DAC 0.104* 0.042* 0.095* 0.184* 0.043* 0.014* 0.037* 0.070* – 0.878* 0.748
10 – ΔPPE 0.814* 0.019* 0.899* 0.075* 0.273* 0.649* 0.234* 0.122* 0.467* – 0.515*
11 – TA 0.324* 0.147* 0.497* 0.468* 0.111* 0.066* 0.084* 0.204* 0.642* 0.377* –
Note(s): *Significant at a level of 5%
Earnings

771
during
management

the diagonal lines for

COVID-19 crisis

matrix presented in
Table 2.

(N 5 22,244)
Brazilian firms
(Pearson) correlation
The spearman
 13,4

772
JAEE

Table 3.

(N 5 139,856)
American firms
presented in the
diagonal lines for
correlation matrix
Spearman (Pearson)
1 2 3 4 5 6 7 8 9 10

1 – INVAT – 0.003 0.017* 0.125* 0.000 0.017* 0.017* 0.000 0.186* 0.042*
2 – ΔREV/Ait1 0.009* – 0.027* 0.014* 0.002 0.001* 0.001 0.000 0.036* 0.048*
3 – PPE/Ait1 0.625* 0.015* – 0.051* 0.002 0.084* 0.101* 0.000 0.347* 0.068*
4 – ROA 0.546* 0.109* 0.480* – 0.001 0.019* 0.032* 0.020* 0.142* 0.038*
5 – BTM 0.264* 0.028* 0.253* 0.337* – 0.001 0.008* 0.004 0.515 0.001
6 – Covid19 0.203* 0.037* 0.194* 0.133* 0.044* – 0.087* 0.011* 0.144 0.012*
7 – Crises 0.252* 0.004 0.204* 0.064* 0.064* 0.087* – 0.012* 0.881* 0.014*
8 – DAC 0.043* 0.114* 0.034* 0.022* 0.022* 0.041* 0.006* – 0.534 0.961*
9 – ΔPPE 0.138* 0.027* 0.257* 0.105* 0.382* 0.107* 0.653* 0.396* – 0.319*
10 – TA 0.009* 0.143* 0.070* 0.040* 0.040* 0.0398 0.006* 0.933* 0.692* –
Note(s): *Significant at a level of 5%
 (1) (2) (3)
Earnings
Variables DAC DAC DAC management
during
Covid19 0.033*** 0.033*** 0.041***
(0.008) (0.008) (0.008) COVID-19 crisis
IFRS 0.025*** 0.021*** 0.028***
(0.003) (0.003) (0.003)
Crises 0.041*** 0.036*** 773
(0.005) (0.005)
ROA 0.000 ***

(0.000)
BTM 0.000***
(0.000)
Observations 22,244 22,244 18,985
R2 0.007 0.010 0.017
Constant Yes Yes Yes
Quarter FE Yes Yes Yes Table 4.
Industry FE Yes Yes Yes Discretionary accruals
Note(s): All of the regressions were estimated by OLS using a panel data perspective for the complete sample vs COVID-19 –
presented in Table 1. The standard errors appear in parentheses: ***p < 0.01, **p < 0.05, *p < 0.1 Brazilian results

(1) (2) (3)

Variables DAC DAC DAC

Covid19 0.000 0.000 0.014***

(0.005) (0.002) (0.002)
Crises 0.002*** 0.002***
(0.001) (0.001)
ROA 0.003***
(0.000)
BTM 0.000
(0.000)
Observations 139,856 139,856 139,856
R2 0.003 0.008 0.019
Constant Yes Yes Yes
Quarter FE Yes Yes Yes Table 5.
Industry FE Yes Yes Yes Discretionary accruals
Note(s): All of the regressions were estimated by OLS using a panel data perspective for the complete sample vs Covid19 –
presented in Table 1. The standard errors appear in parentheses: ***p < 0.01, **p < 0.05, *p < 0.1 American results

that companies have greater incentives to manage their numbers during periods of crisis
because they view them as justifiable occasions to reduce their profits, seek abnormal returns
and attract the attention of creditors and investors, using the justification of the economic
crisis for accounting choices that are distinct from those made in previous quarters.
The control variable Crisesi,t was significant in all of the contexts in which it was used for
Brazil and the USA (Flores et al., 2016). However, the sign of the coefficient for this control
term that accompanies the effects of previous economic crises was negative, while the
coefficient of the Covid19i,t term of interest was positive. This indicates that during periods of
economic crises, earnings management gains prominence, but during the COVID-19 crisis,
this trend was in the opposite direction.
Foroni et al. (2021) mention that the COVID-19 economic crisis has a certain similarity
with the Great Depression of the 1930s and little in common with other crises of the
JAEE 20th and 21st centuries. More specifically, the authors comment that the COVID-19 crisis
13,4 as well as the Great Depression affected all the sectors of the economy in a reasonably
general and equal manner, increasing business uncertainty and implying negative and
lasting effects in the production sectors. In addition, the authors indicate that in terms of
shocks of supply and demand, the COVID-19 pandemic is the event that most resembles
the Great Depression.
Lilley and Rogoff (2020) claimed that COVID-19 has been much more severe than previous
774 crises because it is a public health issue whose conclusion remains unpredictable from the
point of view of economists and public administrators.
That being so, the verification of earnings management practices in the opposing direction
of results obtained in previous crises could be a material expression of the way in which
corporate managers reflect, in financial statements, the choice of procedures that meet their
particular interests, such as, obtaining government subsidies.

4.3 Main results and interpretations of the real earnings management proxy
Tables 6 and 7 present the results obtained from the regression described in Equation (5).
Using the variable of interest in this study as a reference (Covid19), it can be concluded that
there was a statistically negative variation in terms of PPE during the COVID-19 quarters
compared to previous quarters. This result has proved analogous for Brazilian as well as
American firms, except for the fact that the economic significance of the results linked to
Brazilian firms was greater (e.g. 0.053*** < 0.030***). This result indicates that although
earnings management occurred within both samples, the Brazilian values were greater.
On the other hand, the Crises term has statistical significance only for the sample of Brazilian
firms (0.053***). This indicates that it is more common to have statistically abnormal variations
in PPE items for Brazilian firms during moments of economic crisis, which can indicate that
earnings management practices are more common in Brazilian than in American firms.
The combination these results indicates that losses for PPE items are more common in
Brazil during recessions, signaling that “taking a bath” accounting (Scott, 2005) can occur in a
more aggressive manner during crises in emerging economies.
Emerging economies are more concentrated in terms of the number of companies that
operate in real activity segments and are more dependent on foreign investment due to the low
rate of domestic savings (Djankov and Panizza, 2020). Therefore, posting losses for fixed
assets through impairment tests during normal or growth quarters may indicate the
realization of unsuccessful investments on the part of corporate managers. These PPE losses
can inhibit new investment and even damage the image of managers within these
organizations. Therefore more accentuated PPE losses during economic crises is an
indication that Brazilian firms have greater incentive to practice earnings management
during economic crises, especially to give the impression that the losses are due to the
economic recession and not due to poor investments from the point of view of financial returns.

4.4 Robustness tests

Table 8 presents the results obtained by regressions using Equations (6) and (7), which are
based on DiD models, comparing Brazilian and American firms simultaneously but
considering all of the sample observations (unmatched sample).
The results obtained through the Treatment*COVID-19 interaction variable
unmistakably indicate that earnings management practices in terms of the aggregate
accrual proxy (DAC) as well as the earnings management construct based on real activities
(ΔPPE), occur in a statistically more accentuated manner in the Brazilian than in the
American capital markets. This result also held true when we used all of the applicable
control variables (IFRS, ROA, BTM, Crises and Fixed effects).
 (1) (2) (3)
Earnings
Variables ΔPPE ΔPPE ΔPPE management
during
Covid19 0.038*** 0.040*** 0.053***
(0.010) (0.010) (0.011) COVID-19 crisis
IFRS 0.040*** 0.032*** 0.031***
(0.004) (0.004) (0.004)
Crises 0.089*** 0.076*** 775
(0.006) (0.006)
BTM 0.0002*
(0.0001)
Observations 22,244 22,244 22,244
R2 0.018 0.027 0.026
Constant Yes Yes Yes
Quarter FE Yes Yes Yes
Industry FE Yes Yes Yes Table 6.
Note(s): All of the regressions were estimated by OLS using a panel data perspective for the complete sample ΔPPE vs Covid19 –
presented in Table 1. The standard errors appear in parentheses: ***p < 0.01, **p < 0.05, *p < 0.1 Brazilian results

(1) (2) (3)

Variables ΔPPE ΔPPE ΔPPE

Covid19 0.021*** 0.021*** 0.030***

(0.022) (0.004) (0.003)
Crises 0.000 0.000
(0.002) (0.001)
BTM 0.000
(0.000)
Observations 139,856 139,856 139,856
R2 0.036 0.036 0.146
Constant Yes Yes Yes
Quarter FE Yes Yes Yes
Industry FE Yes Yes Yes Table 7.
Note(s): All of the regressions were estimated by OLS using a panel data perspective for the complete sample ΔPPE vs Covid19 –
presented in Table 1. The standard errors appear in parentheses - ***p < 0.01, **p < 0.05, *p < 0.1 American results

Seeking to ensure greater robustness for the findings of the DiD models, we matched the data
samples based on PSM according to the criteria employed by Hong et al. (2018), Franzen and
Weißenberger (2018) and Fleischer et al. (2017). The objective we sought was to maintain the
variation between the dependent terms DAC and ΔPPE while reducing the statistical
significance between the covariates considering the treatment group made up of Brazilian
firms vis-a-vis the control group made up of American firms.
After applying PSM in the statistical manner described by Rosenbaum and Rubin (1983),
we verified that the averages of the dependent variables remained statistically different
between the samples, as expressed in the means test presented in Table 9. By analyzing the
means of the passive covariates (ROA, BTM and Crises), we could deduce that the means in
Brazil and the USA became statistically equal after performing the PSM procedure (Table 10).
The visual inspections of the dependent and covariate variables resulting from the
implementation of PSM are depicted in Figure 3.
Considering that the results after the application of PSM were satisfactory in the terms
expected by Rosenbaum and Rubin (1983), we repeated regressions of the models denoted by
 13,4

776
JAEE

Table 8.
Difference in
differences (DiD) –
unmatched sample
(1) (2) (3) (4) (5) (6)
Variables DAC DAC DAC ΔPPE ΔPPE ΔPPE

Treatment 0.053*** 0.059*** 0.046*** 0.110*** 0.117*** 0.101***

(0.004) (0.004) (0.005) (0.010) (0.010) (0.006)
COVID-19 0.005 0.005 0.020*** 0.103*** 0.103*** 0.128***
(0.005) (0.005) (0.006) (0.005) (0.005) (0.003)
Treatment*COVID-19 0.056*** 0.051*** 0.041** 0.059*** 0.065*** 0.075***
(0.016) (0.016) (0.018) (0.014) (0.014) (0.009)
IFRS 0.032*** 0.039*** 0.040*** 0.039***
(0.005) (0.006) (0.005) (0.003)
ROA 0.001** 0.001***
(0.005) (0.00002)
BTM 0.000 0.000
(0.000) (0.000)
Crises 0.002 0.011***
(0.002) (0.001)
Observations 162,100 162,100 162,100 162,100 162,100 162,100
R2 0.004 0.004 0.003 0.019 0.019 0.051
Constant Yes Yes Yes Yes Yes Yes
Quarter FE Yes Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes Yes
Note(s): All of the regressions were estimated by OLS using a panel data perspective for the complete sample presented in Table 1. The standard errors appear in
parentheses: ***p < 0.01, **p < 0.05, *p < 0.1
Equations (6) and (7). However, this time, we considered the matched samples between the Earnings
Brazilian and American firm-observations, resulting in a matched sample with a total of management
36,902 firm-observations (Table 10).
Once again, through these two proxies, the results indicate that earnings management
during
practices occur in a more pronounced form in the Brazilian than in the American capital COVID-19 crisis
markets (the main result of Column 3 is 0.053** for DAC, and for Column 6 it is 0.152*** for
ΔPPE). These results corroborate the previous explanations, indicating that Hypotheses 1
and 2 have not been rejected. 777

5. Final thoughts
COVID-19 is not only a public health crisis, but also an economic crisis without precedent.
It has profoundly affected social relationships, consequently also affecting the way in which
companies produce and generate employment and income all over the world (Pak et al., 2020).
In this sense, it is possible to identify relevant economic differences during this crisis
compared to other times of economic instability, given that the pandemic has little in common
with other crises of the 20th and 21st centuries (Foroni et al., 2021). Given this scenario, this
study sought to analyze whether the COVID-19 pandemic has stimulated earnings
management by publicly traded firms in Brazil and the USA.
A comparative analysis of these two countries is opportune to the extent that this crisis
constitutes an exogenous shock for both these economies, making it possible to compare the
incentives for earnings management at times of crisis in economic environments with
differing growth trajectories and capital market configurations.
The results suggest that earnings management practices that employ accruals have
varied in a statistically different manner during the COVID-19 economic crisis compared to
other quarters and crises. Similar results support the hypothesis that earnings management
occurs in an abnormal manner as does the proxy that examines this type of manipulation
through real activities.
In terms of the analysis comparing these practices in Brazil and the USA, the following
findings are interesting: (1) Brazil tends to manage earnings through accruals more during
crises compared to the USA; (2) during the COVID-19 crisis, earnings management has been
greater than during other crises in Brazil and the USA; (3) earnings management through real
activities seems to be a more common practice in crises in Brazil than in the USA, even though
specifically during the COVID-19 crisis, American companies have also reported abnormal
levels of PPE losses in relation to other quarters.
These findings are robust and have proved to be consistent when examined using various
statistical tests, including those that use the DiD approach and PSM, considering the matched
samples. In this sense, the economic implications of this study are important, given that the
findings indicate that companies based in emerging economies, such as Brazil, buffeted by
decreasing economic development indicators (e.g. GDP), have a greater propensity to practice
earnings management during crises, such as the COVID-19 pandemic, than do organizations
based in developed economies.
Therefore, it is salutary to emphasize that governmental authorities need to understand
that the information in financial statements during periods of economic anomalies may be

Countries Average of DAC Average of ΔPPE Average of ROA Average of BTM

USA 0.018 0.053 5.2 72.4

Brazil 0.139 0.405 7.8 2.29 Table 9.
p values 0.00*** 0.00*** 0.133 0.892 Means test after the
Note(s): *** Means significant at a level of 1% PSM procedure
 13,4

778
JAEE

Table 10.
Difference in

matched sample
differences (DiD) –
(1) (2) (3) (4) (5) (6)
Variables DAC DAC DAC ΔPPE ΔPPE ΔPPE

Treatment 0.022*** 0.103*** 0.101*** 0.066*** 0.074*** 0.065***

(0.003) (0.014) (0.012) (0.003) (0.003) (0.004)
COVID-19 0.098*** 0.097*** 0.064*** 0.091*** 0.117*** 0.047***
(0.014) (0.012) (0.013) (0.003) (0.013) (0.010)
Treatment*COVID-19 0.031*** 0.049*** 0.053** 0.124*** 0.148*** 0.152***
(0.012) (0.012) (0.014) (0.013) (0.011) (0.016)
IFRS 0.027*** 0.038*** 0.045*** 0.035***
(0.005) (0.005) (0.005) (0.004)
ROA 0.001 0.003***
(0.001) (0.005)
BTM 0.005 0.001
(0.001) (0.005)
Crise 0.041*** 0.033***
(0.006) (0.005)
Observations 36,902 36,902 36,902 36,902 36,902 36,902
R2 0.007 0.007 0.008 0.143 0.145 0.086
Constant Yes Yes Yes Yes Yes Yes
Quarter FE Yes Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes Yes
Note(s): All of the regressions were estimated by OLS using a panel data perspective for the complete sample presented in Table 1. Standard errors in parentheses:
***p < 0.01, **p < 0.05, *p < 0.1
 Earnings
management
during
COVID-19 crisis

779

Figure 3.
Visual inspections
of PSM

biased due to companies deciding to take care of their own interests by seeking lower cost
financing through government subsidies (Crouzet and Tourre, 2020), as well as posting losses
in underperforming investments that should have been reported in previous quarters
(Laskaridou and Athanasios, 2013).

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Corresponding author
Aziz Xavier Beiruth can be contacted at: aziz@fucape.br

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