Examining the impact of earnings management on COVID-19 disclosure in the UK: the moderating role of monitoring mechanisms

Abstract

This study aims to examine the impact of earnings management on the extent of COVID-19-related disclosure among UK firms and investigates how internal and external monitoring mechanisms moderate this effect.COVID-19 disclosure is quantified through Python-based content analysis of annual reports, while earnings management is measured using a signed abnormal accruals proxy to capture both its direction and magnitude. The authors' analysis focuses on FTSE All-Share firms during 2020-2021 and explores the moderating role of monitoring mechanisms, including board independence, audit quality, institutional ownership and analyst following.The study results reveal a significant negative impact of earnings management on COVID-19 disclosure. This effect is mitigated by higher audit quality but is amplified in firms with greater analyst following. While higher audit quality reduces earnings management, firms under greater analyst scrutiny exhibit a stronger tendency towards earnings management, often at the expense of transparency, to meet market expectations. These findings remain robust across alternative variable measurements and regression models.Theoretically, the study extends agency and disclosure theories by showing how managerial discretion, driven by performance incentives and information asymmetry, influences the extent of COVID-19 disclosures during crises. Practically, its findings highlight the need for enhanced investor scrutiny and stronger regulatory oversight, particularly during periods of economic disruption, to curb earnings manipulation and ensure transparent corporate reporting.To the best of the authors' knowledge, this is the first empirical study to assess the impact of earnings management on COVID-19 disclosures in the UK context. It advances our understanding of how financial reporting incentives influence corporate transparency during crises and highlights how different monitoring mechanisms either constrain or amplify earnings management's effect on disclosure behaviour.