ABSTRACT
This research focuses on earnings quality, an issue of great importance to company stakeholders. Although earnings are only a single item in financial statements, they are commonly deemed to be suitable forecasters of future company performance. It is not uncommon that firms manipulate accounting information. However, such activities diminish the transparency of financial reports. High-quality financial information is crucial on capital markets. We make several contributions to corporate finance and accounting literature. First, accrual earnings management methods are detailed and discussed in a European setting. They include the possibilities connected with fixed and current assets, provisions, and taxes. Second, changes in the timing or structuring of real transactions are analysed. Next, narrative descriptions of financial reports are discussed. The research focuses also on methods of earnings opacity detection. Cross-sectional regressions allow us to estimate abnormal levels of accruals, cash flow from operations, discretionary expenditures, and production costs. The study provides new insights into earnings transparency based on international empirical evidence within the framework of European capital markets from 2005 to 2021. Our research shows that managers may sometimes obfuscate a company’s true financial performance, undermining reporting transparency for stakeholders.
