Earnings Management in Denmark: A Behavioral Finance Perspective

Frederik Dahl Nielsen & Simone Bisballe Burrell

Student thesis: Master thesis


The aim of this thesis is to gain insight into the concept of earnings management from a behavioral finance perspective – encompassing a combination of financial, accounting and psychological aspects of the phenomenon. The thesis investigates the prevalence of earnings management among Danish companies listed on Nasdaq OMX Copenhagen between 1989 and 2018 through the Modified Jones Model (Dechow et al., 1995), using discretionary accruals as a proxy for earnings management. The empirical analyses are primarily based on point-in-time data from annual and quarterly financial reports retrieved from Compustats databases. Initially, a literature review is conducted to outline the theoretical framework in measuring earnings management throughout the years to derive an appropriate proxy for earnings management. We provide evidence that Danish listed companies use earnings management, based on an empirical analysis of their usage of discretionary accruals. Furthermore, the thesis explores which heuristics and biases from behavioral finance motivate or influence the use of accrual-related managerial discretion. That is, whether a significant explanatory association between earnings management and the heuristics of hubris, loss aversion and framing, as well as the biases of herding and anchoring can be empirically proven. The analysis begins with a study of the relationship between prospect theory and earnings management. The study exhibits some degree of loss aversion, however, this is solely the case for a short time period after the earnings announcements. In addition, a study of whether investors can detect the use of earnings management showed mixed results. The analysis of whether investor sentiment is associated with earnings management shows statistically insignificant evidence of sentiment-related earnings announcement bias. Lastly, the thesis discusses potential erroneous assumptions, validity problems, model-overdependence and the differences in the information content of annual and quarterly financial reports. Overall, the thesis exhibits proof of the use of earnings management among Danish listed companies and indicates that this potentially is driven by heuristics and biases from the behavioral finance theory.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2019
Number of pages143
SupervisorsSøren Plesner