Effect of earnings management on economic value added: A cross-country study

Zhen-Jia Liu

doi:10.4102/sajbm.v47i1.50

Abstract

This paper addresses the association between earnings management and economic value added (EVA) among nations of the North American Free Trade Agreement (NAFTA), Association of Southeast Asian Nations (ASEAN), European Union (EU), and those classified as a newly industrialized country (NIC). Furthermore, an analysis of the earnings management behaviour is presented based on data from 2009 to 2013. The results indicated that a significantly inverse relationship exists between earnings management through either discretionary accruals (DAs) or real earnings management (REM) activities and EVA in NAFTA and EU nations. Moreover, a significantly positive relationship exists between earnings management through either DAs or REM and EVA in ASEAN and NIC nations. In addition, REM activities exhibit greater explanatory power among these nations.

Highlights

Assessing the real value of corporations is critical for stakeholders
The results indicate that a significantly inverse relationship exists between earnings management through discretionary accruals (DAs) or real earnings management (REM) activities and the Economic value added (EVA) in North American Free Trade Agreement (NAFTA) and European Union (EU) nations
We infer that the enterprises in NAFTA and EU nations have been affected by the financial tsunami

Summary

Introduction

One of the foremost objectives of enterprises is to increase short-term profits and the wealth of owners in the long term (Mohammad et al, 2012).Conventional accounting indices for measuring a firm’s performance include return on assets (Bailey & Helfat, 2003), earnings per share (Neumann & Voetmann, 2005), and return on equity (Peng, 2004). Such measurements are generated from financial statements that follow the generally accepted accounting principles, requiring conservatism in preparing financial statements. EVA is a performance measurement tool (Kaur & Pal, 2008) used to obtain an empirical estimate of shareholder value for indicating the real value of shareholder wealth (Kaur & Narang, 2008)

Methods

Results

Conclusion