The Effects of Earning Management Techniques, Net Income and Cash Flow on Stock Price

Abstract

The purpose of this paper is to examine empirically and detect the extent of practicing Earning management (EM) in Kuwaiti manufacturing companies and to discover the relationship and effects of using earning management practices and declared net income and cash flow in financial statements on stock price in financial markets. The practitioner experience accountant can provide different forms and types of earning and profit in financial statements to users by manipulating with numbers and records and to make benefits out of the flexibility of accounting standards, policies, disclosures and the interference in accounting measurement without violating rules and principles, this paper will focus on analysing the concept of earning management, motivations that stand behind it, methods and techniques that are used to practice it and discussing the different models used to detect these practices, that may give many explanations to the behaviours of managements and accountants, the sample chosen in this study consists of 7 Kuwaiti manufacturing firms listed on the financial market. The modified Jones model (1995) which represents the most favourite model by the researcher was used to estimate the discretionary accruals in order to detect the earnings management practices and to explore the effects of some variable and factors on earning management practices and stock price, a regression model was designed and a statistical analysis was used by (SPSS) to analyse this phenomenon. The results of testing these models on the samples selected showed that the Kuwaiti firms are involved in earning management practices as they exercised the discretionary accruals in a negative way. The tests showed also the negative effect of net income and cash flow that was created from EM practice on stock price. keywords: earning management (EM), net income, cash flow, stock price, and the modified Jones model