Earnings Management and Wage Subsidies During the Covid-19 Pandemic: The Case of Croatian Hotels

This paper examines the relationship between earnings management and wage subsidies allocated to Croatian hotels during the COVID-19 pandemic. Quarterly financial data available on the Zagreb Stock Exchange and subsidies data provided by the Croatian Employment Office were used to estimate the coefficients of random-effects panel models. The level of earnings management in financial statements was estimated by the modified Jones model. The results show that companies with a higher share of subsidies in total assets have a higher propensity to reduce their magnitude of earnings management. In the context of signed accruals, this finding holds only for companies that managed earnings upwards, while the relationship was not statistically significant regarding their counterparts that managed earnings downwards. Considering all the results, it may be concluded that the earnings management behaviour of hotels indicates their tendency of avoiding unnecessary public scrutiny in times of a crisis. Research also has practical implications for the institutions that regulate the allocation of subsidies and other stakeholders of subsidy recipients.