Do firms substitute earnings management methods? The case of the MENA region

Main Article Content

Article Sidebar

Published Dec 7, 2020
Tarek Elkalla

Abstract

The purpose of this paper is to empirically test whether firms substitute accruals-based earnings management with real activities-based earnings management or complement the two methods in the MENA region. Further, this paper seeks to investigate the impact of IFRS adoption on accruals-based earnings management. To test the research hypotheses, this paper employs a panel fixed-effects regression model for a sample of 798 non-financial listed MENA region firms over the period 2008-2015, inclusively. The research findings provide evidence that firms complement accruals-based and real activities-based earnings management methods rather than substituting one earnings management method for the other, which suggests that MENA firms conduct both methods concurrently to achieve earnings targets and are not constrained by the relative costs of employing a particular method. Furthermore, a significant positive association between GDP growth and accruals-based earnings management is found, which provides evidence that economic growth leads to a greater degree of accruals-based earnings management behavior in MENA region firms. 

How to Cite

Elkalla, T. (2020). Do firms substitute earnings management methods? The case of the MENA region . Journal of Research in Emerging Markets, 3(1), 32–43. https://doi.org/10.30585/jrems.v3i1.568
Abstract 103 | PDF Downloads 41

Article Details

Keywords

Accruals-based earnings management, Real Earnings Management, IFRS Adoption

Section
Articles

References

Anagnostopoulou, S. & Tsekrekos, A. (2017). The effect of financial leverage on real and accrual-based earnings management. Accounting and Business Research, 47(2), 191-236.

Cohen, D., Dey, A. & Lys, T. (2008). Real and accrual-based earnings management in the pre- and post-Sarbanes-Oxley periods. The Accounting Review, 83(3), 757-787.

Cohen, D. & Zarowin, P. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2-19.

Dechow, P., Sloan, R. & Sweeney, A. (1995). Detecting earnings management. The Accounting Review, 70(2), 193-225.

Doukakis, L. (2014). The effect of mandatory IFRS adoption on real and accrual-based earnings management activities. Journal of Accounting and Public Policy, 33(6), 551-572.

Ewert, R. & Wagenhofer, A. (2005). Economic effects of tightening accounting standards to restrict earnings management. The Accounting Review, 43(4), 1101-1124.

Filip, A. & Raffournier, B. (2014). Financial crisis and earnings management: The European evidence. The International Journal of Accounting, 49(4), 455-478.

Hamza, S. & Bannouri, S. (2015). The detection of real earnings management in MENA countries: The case of Tunisia. Afro-Asian Journal of Finance and Accounting, 5(2), 135-159.

Hamza, S. & Kortas, N. (2019). The interaction between accounting and real earnings management using simultaneous equation model with panel data. Review of Quantitative Finance and Accounting, 53(4), 1195-1227.

Healy, P. & Wahlen, J. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365-383.

Ho, L., Liao, Q. & Taylor, M. (2015). Real and accrual-based earnings management in the pre- and post-IFRS periods: Evidence from China. Journal of International Financial Management and Accounting, 26(3), 294-335.

Ismail, M. (2017). Real earnings management versus accrual-based and its effect on firm performance: Evidence from Egypt. Alexandria Journal of Accounting Research, 1(2), 1-38.

Jelinek, K. (2007). The effect of leverage increases on earnings management. Journal of Business and Economic Studies, 13(2), 24-46.

Jones, J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193-228.

Khunkaew, R. & Qingxiang, Y. (2019). Substitution between accruals-based and real activities earnings management of listed Thai firms. The Journal of Corporate Accounting & Finance, 30(4), 99-110.

Kuo, J., Ning, L. & Song, X. (2014). The real and accrual-based earnings management behaviors: Evidence from the split share structure reform in China. The International Journal of Accounting, 49(1), 101-136.

Lemma, T., Negash, M. & Mlilo, M. (2013). Determinants of earnings management: Evidence from around the world. SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2370926.

Miller, M. & Rock, K. (1985). Dividend policy under asymmetric information. Journal of Finance, 40(4), 1031-1051.

Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335-370.

Schipper, K. (1989). Commentary on earnings management. Accounting Horizons, 3(4), 91-102.

Watts, R. & Zimmerman, J. (1978). Towards a positive theory of the determination of accounting standards. The Accounting Review, 53(1), 112-134.

Zang, A. (2012). Evidence of the trade-off between real activities manipulation and accrual-based earnings management. The Accounting Review, 87(2), 675-703.

Zhu, T., Lu, M., Shan, Y. & Zhang, Y. (2015). Accrual-based and real activity earnings management at the back door: Evidence from Chinese reverse mergers. Pacific-Basin Finance Journal, 35(1), 317-339.