Quality of financial reporting, external audit, earnings power and companies performance: The case of Gulf Corporate Council Countries

Abstract

Financial statement analysts are concerned about the earnings power of companies, thus reliable information from a quality external audit and financial reporting is important as it will have an effect on the performances of GCC companies. On that note, underpinned by the agency theory, this study examines the effects of financial reporting quality, audit quality, and earnings power on companies’ performances of the six Arabian GCC countries (Saudi Arabia, Bahrain, Oman, Qatar, Kuwait, and the United Arab Emirates). Company performance is measured using the accounting measures, i.e., return on assets and market-to-book value (ROA, M/B) and the market measures (Tobin’s Q, EPS). The data sample of this study covers the period between 2013 and 2017, (pre-covid-19), across 191 companies, using 1337 company-years observations. The study uses EGLS Panel Data Regression analysis. The results of the study indicate that earnings power, audit quality, and financial reporting quality have positive effects on companies’ performance. The agency theory confirms that financial reporting quality and audit quality increases the reliability of financial statements and decreases information asymmetry.