Does earnings management improve access to finance? Evidence from French farms

Abstract

This study examines the extent to which farms engage in earnings management to improve their access to finance and the effectiveness of this strategy. Like many small and medium-sized enterprises, farms rely heavily on bank loans for their development. However, little is known about their ability to manipulate their earnings in order to increase their chances of obtaining a loan. The detection and measurement of earnings management is based on two accrual accounting models commonly referenced in the literature: the Modified Jones model and the Performance Matching model. Data are collected from the Farm Accountancy Data Network (FADN), which is representative of French professional farms over the period 2000-2023. Two panel data models are estimated to explain the effect of earnings management on farm access to credit: one with logit models and the other with generalized method of moments models. The results show that farms significantly increase their earnings in the year before borrowing money, enabling them to enhance their borrowing capacity while reducing borrowing costs. These findings call into question creditors’ ability to fully account for earnings manipulation when lending to small companies. The discussion contributes to the growing body of research on the relationship between earnings management and access to credit for farms and small firms.