In the name of others: an investigation of earnings management motives in Egypt

Abstract

PurposePrevious literature on earnings management (EM) indicates that managers are motivated to adjust reported income to serve their own self-interests, and to try and influence capital markets. However, previous research has failed to provide an appropriate theoretical underpinning for EM and has ignored the effect of cultural and environmental factors on shaping managers’ motivations. Therefore the purpose of this paper is to draw on interpretive methodology and new institutional sociology (NIS) theory to identify the external factors that motivate managers of Egyptian companies to use EM to modify financial statements.Design/methodology/approachThe research adopted an interpretative methodology and interview methods. Interviewees were conducted with 34 participants, who were divided into four different categories; executives, financial analysts, auditors and stock exchanges’ authorities.FindingsThis paper provides empirical evidence on the range of external factors that motivate Egyptian corporate executives to adjust the earnings number in financial statements. These external factors include the expectations of investors, lenders and employees, the impact of stock exchange listing rules, beating an earnings target, and the privatisation of key state-owned companies.Research limitations/implicationsThe authors recognise that the paper has a number of limitations. The research is concerned solely with EM in Egypt and, therefore, it would not be safe to generalise the results to other contexts, even in the Middle East. Further research on the behaviour of managers towards EM in other countries would be useful to test validity of the results reported in this paper.Originality/valueThe principal contribution of this paper is to build on the previous EM literature to include external factors within the Egyptian context which motivate Egyptian managers to manage the earnings of companies in an upward direction. It adds additional EM motives to available literature including: employees, stock exchange’s rules, privatisation and meeting industrial norms. Also, the paper provides evidence of the effect of concentrated share ownership on managers’ likelihood to engage in EM behaviour. The paper also extends NIS theory to recognise the importance of the interplay between institutional and economic environment by including economic reform, and non-financial providers as factors that can explain the EM behaviour.