Do Earnings Management Leads to Sub-optimal Investments by Firms? Empirical Evidence From the Textile Sector of Pakistan

Umair Saeed Bhutta,Zhang Youtang,Ali Raza

doi:10.18775/jibrm.1849-8558.2015.42.3002

Umair Saeed Bhutta, Zhang Youtang + Show 1 more

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https://doi.org/10.18775/jibrm.1849-8558.2015.42.3002

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Abstract

This study empirically investigates the impact of earnings management on investments of the firm. In this study, we also check the moderating role of audit quality between the above said relationship. We hypothesize that audit quality will not only weakens the relationship between earnings management and inefficient investments but also help the firm to invest reduction in over and under investments by the firm. Textile sector of Pakistan is selected for the study as it is one of the most important sectors of the country. The role of audit quality cannot be ignored to improve the information quality which ultimately helps the firm to make optimal decisions for the firm shareholders. The earning management activities are performed by firm managers due to moral hazard and adverse selection problem which leads to sub-optimal investments.

Highlights

T he earning management activities are performed by firm managers due to moral hazard and adverse selection problem which leads to sub-optimal investments
The quality of auditors has a significant impact on the financial statements quality of the firms and due to recent financial frauds in the corporate world, the auditors' role is under scrutiny (Romanus et al, 2008)
This research will be different from earlier research in this topic (Biddle et al, 2009, Cutillas Gomariz and Sánchez Ballesta, 2014, Houcine, 2013), in the sense that we are looking at the moderating effect of audit quality in relation to EM and investment efficiency

Summary

Introduction

We analyze how Pakistan's firms are managing their earnings and how the moderating impact of audit has a positive influence on this relationship. Asma (2017), conduct her study by examining how four different characteristics of financial information have an impact on the investment efficiency of the firm. She points out that her research result suggests that characteristics of financial information like reliability and smoothness improve the quality of investments made by the firm. The other two factors namely conservatism and relevance have no impact on the quality of investments made by the firm She conducted her study in the financial environment of Tunisia.

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Discussion

Conclusion