Original scientific paper
https://doi.org/10.51680/ev.39.1.11
Were windfall profits and its tax regulation in 2022 the trigger of earnings management? Analysis of Croatian manufacturing companies
Ivica Pervan
orcid.org/0000-0003-1987-7702
; University of Split, Faculty of Economics, Business and Tourism, Croatia
*
Maja Pervan
; University of Split, Faculty of Economics, Business and Tourism, Croatia
* Corresponding author.
Abstract
Purpose: This research, conducted on a sample of Croatian manufacturing companies, investigates whether windfall profits and their tax regulation in 2022 triggered earnings management.
Methodology: This research uses a company-level difference-in-differences design within the FE panel model for the period 2021 - 2023. Two interaction variables are designed to capture broader and direct effects of expected political costs. The research model also includes controls for company-level variables to capture the other motives of earnings management.
Results: The occurrence of windfall profits in 2022 did not cause systematic downward earnings management. However, windfall profits in 2022 intensified negative earnings management in the segment of companies that had only negative discretionary accruals. The interaction variable that captures only those companies that were subject to windfall tax regulation in Croatia is negative and statistically significant. This finding confirms that actual exposure to windfall profit regulation is a more pronounced motive for downward earnings management than the mere existence of windfall profits. The control variables exhibit signs that are consistent with theoretical assumptions and previous research.
Conclusion: Research on a sample of Croatian manufacturing companies conditionally confirmed the political cost hypothesis, i.e., only for the companies facing clear and pronounced political costs. However, the observed earnings management practices were not caused only by windfall profits tax regulation but can be linked to the company’s indebtedness, profitability, and general level of taxation.
Keywords
windfall profits; discretionary accruals; earnings management; Croatia
Hrčak ID:
348491
URI
Publication date:
28.6.2026.
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