Umeå University's logo

The topic of intangible assets in relation to earnings management has been a debated subject for a long time. Different aspects of intangible assets have been thoroughly examined in relationship to earnings management by scholars over the years whether it’s about goodwill from business acquisition, recognition of intangible assets, timely impairments and so on. The authors found from their literature review that there was a knowledge gap when it came to intangible assets as most studies have focused on one part of the intangible assets and that has usually been goodwill.

The theoretical framework consists of different theories which are explained and discussed in how they can relate to and give incentives for engaging with earnings management. This can range from opportunistic managers trying to reach bonus goals to pressure from within the company or from other stakeholders to an intent to reach the market expectations for the company. The purpose for this thesis is to examine the relationship if a larger proportion of intangible assets increases the risk for earnings management. In order to do this the authors will use an economical model to measure accruals earnings management. The connection between intangible assets and earnings management is a well threaded area where most results point towards a positive correlation. However, as far as the authors of this study can see no research has been done in a larger geographical context.

This thesis aims to fill the gap of a larger geographical area. This has been done by examining publicly listed firms in the European Union. The European Union was chosen since it was a good opportunity to check this relationship over a larger geographical area and it is also suitable since it is mandatory that all publicly listed firms within the European Union region use the same accounting standard (IFRS) which makes it possible to do comparisons. This research has found evidence for a negative correlation between intangible assets and earnings management, this result is contrary to most other studies and therefore shines a light on a possible bias on the earlier research in this area. It could possibly be an indication of income minimizing and/or income smoothing when viewed through the lens of agency theory since managers viewed from that want to reach a desired result to trigger larger bonuses and promotions for him/herself. Aggressive depreciations of intangible assets and goodwill could be done to reach expected results and trigger higher bonuses. When it comes to the shareholder theory there is a possibility that this thesis does not capture it fully since the goal for the shareholder theory is to maximize the net present value and the closest proxy for that in this thesis is ROA which was shown to have a positive correlation to earnings management but not on a significant level. Positive accounting theory gives weight to the agency theory when it comes to our findings since it states that managers act in their own self-interest and choose accounting methods that allow them to reach those goals.

This is a quantitative cross-sectional study consisting of 6373 observations that has been collected over a five-year period (2016-2020) from a financial database (ORBIS). The data has been tested with a standard linear regression analysis and shows significant results.