Operating performance and manipulation of accruals

Abstract: Taking the developing Egyptian market as its focal point, the aim of this research is to contribute to the earnings management literature. Due to the limited data available for the Egyptian market, this research examines earnings management based on the entire operating performance of companies. In particular, the question of whether ineffectively performing Egyp-tian companies engage in upward earnings management by devising and applying income-increasing policies was investigated. For the purpose of testing for income-increasing accruals, we examine whether discretionary accruals are greater for ineffectively performing firms than for effectively performing firms. The results show that ineffectively performing Egyptian companies are characterized by positive and considerably greater discretionary accruals when comparatively examined against effectively performing companies. A reasonable interpretation of these results is that ineffectively performing companies engage in earnings management practices, with the most likely mechanism being an opportunistic increase in their reported earnings. Overall, the findings of this study show that operating performance is a critical determinant of earnings management. In terms of the implications of these findings, it is necessary for officials within the Egyptian government to enhance the country’s corporate govern-ance processes, especially in view of the limitations surrounding law enforcement and investor safeguards.

How to cite this paper

 Mostafa, W. (2020). Operating performance and manipulation of accruals.Management Science Letters , 10(5), 985-994.

Refrences

Abdelsalam, O. H., & Weetman, P. (2007). Measuring accounting disclosure in a period of complex changes: The case of Egypt. Advances in International Accounting, 20, 75-104.
Alford, A., Jones, J., Leftwich, R., & Zmijewski, M. (1993). The relative informativeness of accounting disclosures in dif-ferent countries. Journal of Accounting Research, 31(3), Supplement 183-223.
Amir, E., Harris, T. S., & Venuti, E. K. (1993). A comparison of the value-relevance of U.S. versus non-U.S. GAAP ac-counting measures using form 20-F reconciliations. Journal of Accounting Research, 31(Supplement), 230-264.
Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future cash flows. The Accounting Re-view, 76(1), January 27-58.
Beneish, M. D. (2001). Earnings management: A perspective. Managerial Finance, 27(12), 3-17.
Braam, G., Nandy, M., Weitzel, U., & Lodh, S. (2015). Accrual-based and real earnings management and political connec-tions. The International Journal of Accounting, 50(2), 111–141.
Burgstahler, D., & Eames, M. (1998). Management of earnings and analysts forecasts. Working Paper, University of Washington.
Cahan, S. F. (1992). The effect of antitrust investigations on discretionary accruals: A refined test of the political-cost hy-pothesis. The Accounting Review, 67(1), 77-95.
Davidson, S., Stickney, C. and Weil, R. (1987). Accounting: The Language of Business. 7th ed., Arizona: Thomas Horton & Daughter.
DeAngelo, L. E. (1986). Accounting numbers as market valuation substitutes: A study of management buyouts of public stockholders. The Accounting Review, 61(3), 400-420.
DeAngelo, L. E. (1988). Managerial competition, information costs, and corporate governance: The use of accounting per-formance measures in proxy contests. Journal of Accounting and Economics, 10, 3-36.
Dechow, P. M., & Skinner, D. J. (2000). Earnings management: Reconciling the views of accounting academics, practi-tioners, and regulators. Accounting Horizons, 14(2), 235-250.
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193-225.
DeFond, M. L., & Jiambalvo, J. (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics, 17, 145-176.
Ebaid, I. E.-S. (2012). The value relevance of accounting-based performance measures in emerging economies: The case of Egypt. Management Research Review, 35(1), 69-88.
Enomoto, M., Kimura, F., & Yamaguchi, T. (2015). Accrual-based and real earnings management: An international com-parison for investor protection. Journal of Contemporary Accounting and Economics, 11(3), 183–198.
Ewert, R., & Wagenhofer, A. (2005). Economic Effects of Tightening Accounting Standards to Restrict Earnings Man-agement. The Accounting Review, 80(4), 1101-1124.
Farag, S. M. (2009). The Accounting Profession in Egypt: Its Origin and Development. The International Journal of Ac-counting, 44, 403-414.
Givoly, D., & Hayn, C. (2000). The changing time-series properties of earnings, cash flows and accruals: Has financial re-porting become more conservative?. Journal of Accounting and Economics, 29, 287-320.
Gunny, K. A. (2010). The relation between earnings management using real activities manipulation and future perfor-mance: Evidence from meeting earnings benchmarks. Contemporary Accounting Research, 27(3), 855–888.
Han, J. C. Y., & Wang, S.-W. (1998). Political costs and earnings management of oil companies during the 1990 (Persian Gulf Crisis). The Accounting Review, 73(1), 103-117.
Healy, P. M. (1985). The effect of bonus schemes on accounting Decisions. Journal of Accounting and Economics, 7, 85-107.
Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365-383.
Ipino, E., and Parbonetti, A. (2017). Mandatory IFRS adoption: The trade-off between accrual-based and real earnings management. Accounting and Business Research, 47(1), 91–121.
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193-228.
Levitt, A. (1998). The Numbers Game. Speech Delivered at New York University Center for Law and Business, New York, NY, September, 28.
McNichols, M., & Wilson, P. (1988). Evidence of earnings management from the provision for bad debts. Journal of Ac-counting Research, 26(9), 1-31.
Moore, P. (1995). Egypt Investment and Growth. London: Euromoney Publications.
Moses, O. D. (1987). Income smoothing and incentives: Empirical tests using accounting changes. The Accounting Re-view, 62(2), April 358-377.
Mostafa, W., & Ibrahim, M. (2019). Firm performance and earnings management. Academy of Accounting and Financial Studies Journal, 23(3), 1-11.
Perry, S. E., & Williams, T. H. (1994). Earnings management preceding management buyout offers. Journal of Account-ing and Economics, 18, 157-179.
Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Eco-nomics, 42, 335-370.
Sevin, S., & Schroeder, R. (2005). Earnings management: Evidence from SFAS No. 142 reporting. Managerial Auditing Journal, 20(1), 47-54.
Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings?. The Ac-counting Review, 71(3), July 289-315.
Subramanyam, K. R. (1996). The pricing of discretionary accruals. Journal of Accounting and Economics, 22, 249-281.
Teoh, S. H., Welch, I., & Wong, T. J. (1998 A). Earnings management and the long-run market performance of initial pub-lic offerings. The Journal of Finance, 53(6), 1935-1974.
Teoh, S. H., Welch, I., & Wong, T. J. (1998 B). Earnings management and the underperformance of seasoned equity offer-ings. Journal of Financial Economics, 50, 63-99.
Watts, R. L., & Zimmerman, J. L. (1978). Towards a positive theory of the determination of accounting Standards. The Accounting Review, 53(1), January 112-134.
Zang, A. Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings manage-ment. The Accounting Review, 87(2), 675–703.
Yoon, S. S., & Miller, G. A. (2002). Cash from operations and earnings management in Korea. The International Journal of Accounting, 37, 395-412.

Journals

MSL Volumes

Keywords

Authors

Countries

Management Science Letters

Operating performance and manipulation of accruals Pages 985-994 Download PDF

Add Reviews