Cross-country comparison of real earnings management: Evidence from the UK, France, and Germany using alternative real earnings management models

Abstract

This study is motivated by the need to better understand real earnings management (REM) behaviour among firms with strong incentives to avoid loss reporting within a common accounting standards environment. Focusing on marginally positive earnings firm-years, the study examines REM practices using a cross-country sample of 21,092 firm-year observations from non-financial listed firms in the United Kingdom, France, and Germany, obtained from Datastream. REM is measured using the widely adopted framework alongside investment opportunity set (IOS) and performance-matched (PM) model specifications to enhance measurement robustness. The empirical analysis employs the Fama–MacBeth two-step regression procedure with Newey–West standard errors to correct for heteroskedasticity and autocorrelation. The findings reveal that firms consistently employ individual and collective real earnings management (REM) techniques across marginally positive earnings firm-years. This pattern suggests that REM constitutes a pervasive mechanism through which managers respond to reporting incentives when earnings are close to critical thresholds. The results are robust across alternative REM model specifications, confirming the reliability of the empirical evidence. Overall, the study demonstrates that REM represents a dominant earnings management strategy in threshold-driven reporting contexts in shaping reporting behaviour within a common accounting standards environment.