Earnings management in response to the oil price shock of 2014: Evidence from Oslo Stock Exchange
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- NTNU Handelshøyskolen 
This thesis studies the relationship between the oil price shock of 2014 and earnings management in Oslo Stock Exchange listed oil companies. We analyse whether investors and other stakeholders need extra scepticism to the financial statements during a crisis. Following prior research, well-established discretionary accruals models are used to estimate earnings management behaviour. By using a bootstrapping procedure, we test whether there is a significant difference in earnings management between the pre-crisis and the crisis period. The results show a significant increase in earnings management following the oil price drop. Moreover, we investigate which direction companies adjust earnings and find abnormal incomedecreasing accruals during the third and fourth quarter of 2014. We attribute this finding to the big bath strategy, where managers manipulate earnings downward to make poor results worse, artificially enhancing subsequent earnings as the accruals reverse. This thesis contributes to the literature in several ways. First, to the understanding of the effect of macroeconomic shocks on earnings management behaviour. Second, we supplement the earnings management literature on oil and oil-related companies by looking at how a negative oil price shock affects oil companies. And third, we contribute to the limited research on earnings management in a Norwegian context.