Do franchise firms manage their earnings more? Investigating the earnings management of restaurant firms

Earnings management has become more prevalent in many firms. Accordingly, the financial accounting literature has made efforts to identify the determinants of earnings management behavior in various industries. However, for the restaurant industry it may be necessary to consider the effects of franchising to accurately understand earnings management behaviors because franchise restaurants vastly differ from non-franchise restaurants in terms of raising capital and information asymmetry. Therefore, the main purpose of this study was to investigate whether franchising as a firm characteristic causes any meaningful differences in the earnings management behavior of restaurant firms. The results of this study show that during the growth phase, franchise restaurants engage more actively in earnings management than non-franchise restaurants. Further, the deterrence effect of financial leverage on earnings management is weaker for franchise restaurants than non-franchise restaurants. Overall, this study suggests that franchise restaurants are generally more inclined towards earnings management.