Do firms use industry-wide targets when managing earnings? Finnish evidence

Abstract This study investigates the adjustment process of the earnings management of the firm to industry-wide targets in Finland, where accounting and tax legislation provide extensive possibilities for firms to manage their earnings. In addition, the amount of earnings management is directly measurable from published financial statements of the Finnish firms. The results of the study indicate that the management of a firm takes into account the extent of the earnings management of other firms operating in the same industry when managing reported earnings. Furthermore, firms seem to consider mainly the permanent part of the change in the industry average when determining the target level of earnings management.