Size management at regulatory thresholds by Norwegian companies

Abstract

Discrete regulatory thresholds can incentivize companies to adjust size. In this thesis, we examine size management by Norwegian companies around thresholds for audit exemption, size classification and VAT-reporting. We adapt recently developed methodology on bunching. Our sample consist of data from all reported financial statements of Norwegian limited liability companies in the period of 1994 to 2015. We identify significant size management around the revenue threshold for audit exemption, but it is not found around the other thresholds. In the period 2012- 2015, there are approximately 14% more company-years than expected just below the revenue threshold, but the economic effect is limited. The average adjustment is estimated to approximately 147,000 NOK, adding up to a total of 58 mNOK. We are not able to identify one dominant method of size management, but our analysis indicate that companies reduce input rather than underreport revenues. The behavior is temporary and does not appear to significantly limit growth. Furthermore, we find a higher proportion of size management in unaudited companies and cash-intensive industries.