Earnings Management and Firm Performance: Analyzing the Impact of COVID-19

Abstract

Earnings management has long been in practice for several reasons with various implications reported on firm performance. The COVID-19 pandemic has created another compelling reason for earnings management to be conducted as it has undoubtedly affected many businesses financially. This study examines the impact of earnings management on firm performance during the COVID-19 pandemic hits. Earnings management is quantified following the Roychowdhury-inspired model of real earnings management, where abnormal cash flows from operation, abnormal discretionary expenses, and abnormal production costs are used as proxies. As for performance, it is reflected through the firm’s return on assets (ROA), return on equity (ROE) as well as earnings per share (EPS). The sample for the study comprises a number of consumer goods firms listed in Bursa Malaysia from 2020 through 2021. Analyses of descriptive statistics, correlation analysis, and multiple regressions were adopted to test the research hypotheses. Results showed that earnings management had a positive but insignificant impact on firm performance during the pandemic years. This study adds to the body of knowledge by shedding light on the effects of earnings management during the pandemic and by expanding the literature on earnings management. This is particularly useful for managers, investors, and analysts for decision-making and analysis purposes.