Accrual and real earnings management in both state-owned and privately-owned Egyptian companies

Ahmed B A Boghdady

doi:10.22495/cocv17i1art1

Abstract

This study aims to explore the difference between the level of both types of earnings management; Accrual Earnings Management (AEM) and Real Activity Earnings Management (REM)) between state and privately owned Egyptian companies. Using a sample of non-financial state and privately owned companies over the period from 2010 to 2017, with 1030 firm–year observations. The results reveal that there are no significant differences in the level of both AEM and REM using the two proxies; sales manipulation and discretionary expenses; between state and privately owned firms. This result could be attributed to the Egyptian government’s attempt to eliminate the differences between state-owned and private owned companies, especially in recent years.

Highlights

The earnings management practices are classified as either the change in the accrual process (AEM) or the deviation from normal business activity (REM)
The median of discretionary accruals (DA) in Egyptian companies is - 0.2% (0.000) and falls between - 88.2% and 59.3% of total assets. This implies that Accrual earnings management (AEM) in Egypt is more severe than in other countries such as USA based on Xie et al (2003) who find that discretionary accruals in USA fall between - 27% and 67% of total assets
The results show that there are no significant differences in the level of accrual earnings management and real earnings management using, both sales manipulation and discretionary expenses between state and privately owned firms and, fail to reject H1, H2-a, and H2-b

Summary

Introduction

The earnings management practices are classified as either the change in the accrual process (AEM) or the deviation from normal business activity (REM). REM, on the other hand, requires departing from normal operations, driven by the desire of managers to deceive at least some stakeholders to consider that the reported financial performance has been achieved from normal operations (Kothari, Mizik & Roychowdhury, 2015). Those earnings management types are managersdecisions to alter a current period’s earnings to achieve temporary goals that may adversely affect the firm’s long-term value maximization objective. It is broadly argued that state companies practice earnings management more than private ones. Agency problems are more severe in SOs than in POs due to the various forms of conflicts including those between the state and minority and between state and managers (Wang & Yung, 2011)

Objectives

Results

Conclusion