Free Cash Flow and Earnings Management in Brazil: The Negative Side of Financial Slack

Antonio Lopo Martinez; Fabricio Terci Cardoso; Aridelmo J. C. Teixeira

Free Cash Flow and Earnings Management in Brazil: The Negative Side of Financial Slack

Antonio Lopo Martinez * §

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Fabricio Terci Cardoso

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Aridelmo J. C. Teixeira

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§ Fucape Business School

Free Cash Flow and Earnings Management in Brazil: The Negative Side of Financial Slack

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Abstract

The article investigates whether Brazilian firms with excess free cash flow (FCF) and low growth perspectives (Jensen. 1986), when there is excess FCF, accompanied by limited growth perspectives, managers have incentives to camouflage the impact of investments in projects with negative net present value (NPV) by presenting inflated profits. The study includes firms listed on the BMF&Bovespa in the period from 2008 to 2012. Discretionary accruals (DA) were estimated by the modified Jones model and then the relationship between FCF and DA was ascertained by multiple regression. The results indicate that firms with low growth perspectives and excess FCF are more likely to manage earnings to increase profits. Shareholding concentration and adoption of IFRS moderate this relationship (FCF x DA), i.e., in practical terms they restrict the propensity to engage in this type of earnings management. This study is relevant by identifying a tendency to manage earnings. Regulators and investors should pay particular attention to the accounting results disclosed in the presence of excess free cash flow and low growth perspectives.

References

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Funding

No external funding was declared for this work.

Conflict of Interest

The authors declare no conflict of interest.

Ethical Approval

No ethics committee approval was required for this article type.

Data Availability

Not applicable for this article.

How to Cite This Article

Antonio Martinez, Fabricio Cardoso, Aridelmo Teixeira. 2014. "Free Cash Flow and Earnings Management in Brazil: The Negative Side of Financial Slack". Global Journal of Management and Business Research, Global Journal of Management and Business Research - D: Accounting & Auditing GJMBR-D Volume 14 (GJMBR Volume 14 Issue D1).

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Journal Specifications

Crossref Journal DOI 10.17406/GJMBR

Print ISSN 0975-5853

e-ISSN 2249-4588

Keywords

discretionary accruals earnings management free cash flow

Classification

GJMBR-D Classification JEL Code: O16

M19

Submission ReceivedDecember 15, 2013
Peer Review Double Blind
Handling Editor
Accepted January 2, 2014
Published January 15, 2014

Version of record

v1.2

Issue date

March 25, 2014

Language

English

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Article Matrices

Total Score: 150

Country: Brazil

Subject: Global Journal of Management and Business Research

Authors: Fabricio Terci Cardoso, Antonio Lopo Martinez, Aridelmo J. C. Teixeira (PhD/Dr. count: 0)

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