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Earnings Management in Recession and Recovery Periods

This article investigates earnings management during the recession and recovery periods (2008 and 2013) for S&P 500 companies. Using the modified Jones model, the results suggest that these companies managed their earnings in both periods, but they managed their earnings much more in the recession period, which may be attributed to the desire to avoid or mitigate the negative consequences of experiencing deep losses. The results also raise questions about the reliability of the companies’ financial statements. The findings of this research are useful to the Securities and Exchange Commission and auditors, and they imply that more careful scrutinisation of companies’ financial statements is needed to better inform investors and creditors relying on these statements. JEL Classification: M41