Abstract
This paper studies earnings management in Jordan during the global financial crisis. It addresses mainly the question of whether or not financial crisis has an impact on discretionary accruals, using the modified Jones model (1995) for estimating discretionary accruals. By applying Ordinary Least Squares regression model on a sample of 71 nonfinancial listed firms during the period of 2005-2012, I find a conclusive evidence that Jordanian nonfinancial listed firms did not engage in a greater level of earnings management during the financial crisis period. In addition, larger firms are less involved in earnings management practices compared to smaller firms. Moreover, the results suggest a negative significant impact of operating cash flow on discretionary accruals, while it fails to connect current year losses with discretionary accruals. However, the findings indicate that firm’s leverage is positively and significantly associated with discretionary accruals. Overall, the empirical results provided evidence that earnings management practices in Jordanian nonfinancial sectors are relatively small, even smaller in services sector, which raise questions about the validity of the modified Jones model and whether or not different models (such as Deangelo, 1986) should be used in future studies regarding earnings management.
Highlights
1.1 Earnings Management Definition, Incentives and TechniquesThere are several definitions for earnings management. Schipper (1989) defined it as an intentional intervention in the external financial reporting process in order to obtain private gain
discretionary accruals (DACC) = the absolute value of the difference between total accruals and the non-discretionary components of accruals, CRIS = dummy variable that equals to 1 during financial crisis and 0 otherwise, operating cash flow (OCF) = cash flow from operating activities scaled by the book value of lagged total assets, SIZE = the natural logarithm of the firm’s fiscal year-end total assets, Negative Earnings (NEG) = dummy variable that equals to 1 if loss is occurred in the current year and 0 otherwise, LEV = total debt to total assets
Variable that equals to 1 during financial crisis and 0 otherwise, OCF = cash flow from operating activities scaled by the book value of lagged total assets, SIZE = the natural logarithm of the firm’s fiscal year-end total assets, NEG = dummy variable that equals to 1 if loss is occurred in the current year and 0 otherwise, LEV = total debt to total assets
Summary
There are several definitions for earnings management. Schipper (1989) defined it as an intentional intervention in the external financial reporting process in order to obtain private gain. Many studies defined the period of global financial crisis between (2008-2009), whereas 2006 and 2007 are considered as the pre-crisis (see for example, Mollik et al, 2013; Kousenidis et al, 2013 and Costa, 2016) It is well-known that economic turbulence affects the operations, financial transactions and the earnings of all the firms in the economy. Banks (lenders in general) have the right to reject concession and insist on liquidation for debt recovery, they usually prefer debt restructuring by making concessions, giving more time for principal and interest payment, or lowering the interest rate, since firm’s assets will likely have a low realizable value during economic downturn (Shleifer & Vishny, 1997) Another strong incentive for managers to manipulate earnings downwards during the crisis period is that financially troubled firms are likely to get financial aid from the government. The demand for high quality audit associated with high quality information has raised due to the financial crisis
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