Earnings management behaviour of Shariah-compliant firms and non-Shariah-compliant firms

2015 ◽  
Vol 6 (2) ◽  
pp. 173-188 ◽  
Author(s):  
Omar Farooq ◽  
Allaa AbdelBari
Keyword(s):  
Earnings Management ◽  
United Arab Emirates ◽  
Information Disclosure ◽  
Common Law ◽  
Mena Region ◽  
Content Type ◽  
Crisis Period ◽  
Significant Difference ◽  
Financial Characteristics ◽  
The Impact

Purpose – This paper aims to answer the following questions by using the data from the MENA region (Morocco, Egypt, Saudi Arabia, United Arab Emirates, Jordan, Kuwait and Bahrain): Do Shariah-compliant firms differ from other firms in the quality of information disclosure? and Can investors consider information disclosed by Shariah-compliant firms more truthful than information disclosed by other firms? Design/methodology/approach – Using regression analysis, this paper examines the relationship between earnings management and Shariah compliance during the period between 2005 and 2009. Findings – Results show that Shariah-compliant firms engage in lower earnings management than non-Shariah-compliant firms. This paper argues that financial characteristics of Shariah-compliant firms (i.e. low leverage, low account receivables and low cash) provide lower chances to managers to misreport earnings. It is also shown that external conditions can minimize the difference in earnings management between the two groups. Results show no significant difference between earnings management of Shariah-compliant firms and earnings management of non-Shariah-compliant firms in the common law countries and during the crisis period. This paper considers high risk of litigation in common law countries and enhanced monitoring of stock market participants during the crisis period main factors behind these results. This paper argues that external governance mechanisms can result in improving disclosure practices of non-Shariah-compliant firms to a level that minimizes the impact of Shariah compliance on earnings management. Practical implications – Results have implications for investors and regulators functioning in the MENA region. These results indicate that non-Shariah-compliant firms, being more prone to earnings misreporting, need more scrutiny from regulators than Shariah-compliant firms. Originality/value – The authors believe that this paper is the first attempt to argue that it is the financial characteristics of Shariah-compliant firms (i.e. low leverage, low account receivables and low cash) that result in better disclosure of reported earnings.

scholarly journals The impact of CEOs’ accounting backgrounds on earnings management and conservatism

2017 ◽  
Vol 10 (1) ◽  
pp. 4-24
Author(s):  
Nan Hu ◽  
Rong Huang ◽  
Xu Li ◽  
Ling Liu
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Discretionary Accruals ◽  
Accounting Conservatism ◽  
Policy Implications ◽  
Good News ◽  
Content Type ◽  
Accounting Research ◽  
Significant Difference ◽  
The Impact

Purpose Existing literature in experimental accounting research suggests that accounting professionals and people with accounting backgrounds tend to have a lower level of moral reasoning and ethical development. Motivated by these findings, this paper aims to examine whether chief executive officers (CEOs) with accounting backgrounds have an impact on firms’ earnings management behavior and the level of accounting conservatism. Design/methodology/approach The authors classify CEOs into those with and without accounting backgrounds using BoardEx data. Using discretionary accruals from several different models, they do not find that CEOs with accounting backgrounds are more likely to engage in income-increasing accruals. However, the authors find that CEOs with accounting backgrounds exhibit lower levels of conservatism, proxied by C-scores and T-scores (Basu, 1997). This finding suggests that CEOs with accounting backgrounds recognize bad news more quickly than good news, consistent with the accounting principle of “anticipating all losses but anticipating no gains”. Findings The authors show that firms whose CEOs have accounting backgrounds exhibit lower levels of accounting conservatism. However, these firms do not exhibit higher levels of income-increasing discretionary accruals. This study documents the impact of CEOs’ educational backgrounds on firms’ accounting choices and confirms prior findings in experimental accounting research using large sample archival data. Originality/value This paper is the first study that investigates the impact of CEOs’ accounting backgrounds on firms’ financial reporting policy. The findings may have some policy implications. If accounting backgrounds of CEOs can make a significant difference on firms’ behavior, it is reasonable to make CEOs accountable for the quality of financial reporting. This paper is one of the first to empirically test inferences drawn by experimental accounting research. There has been a gap between archival and experimental accounting studies. The authors propose that interesting research questions can be addressed by filling in such a gap.

Web-based disclosure and the cost of debt: MENA countries evidence

2020 ◽  
Vol 18 (3) ◽  
pp. 533-561
Author(s):  
Henda Abdi ◽  
Mohamed Ali Brahim Omri
Keyword(s):  
Information Disclosure ◽  
Developed Countries ◽  
Economic Consequences ◽  
Cost Of Debt ◽  
Mena Region ◽  
Web Based ◽  
Content Type ◽  
Mena Countries ◽  
The Cost ◽  
The Impact

Purpose The aim of this study is to investigate the effect of web - based disclosure on the cost of debt for the MENA region setting. Design/methodology/approach The sample of this paper consists of 237 MENA listed non-financial companies for the year 2017. Multiple regression models were used to examine the impact of online disclosure on the cost of debt. Content analysis is used to measure the extent of web-based disclosure. Findings The results reveal that there is a negative and significant association between the web-based disclosure and the company’s cost of debt. These results support the hypothesis of the economic utility of the information disclosed on the website for creditors in this region. Practical implications The results of the study have important implications for managers in the MENA region. It is necessary for managers to improve the company’s transparency through web-based disclosure. The companies must benefit from the different technologies offered by the Internet in order to offer to the creditors unlimited access to up to date information. In fact, web-based disclosure may mitigate the information asymmetry, the uncertainty of creditors and, consequently, reduces the cost of debt. 10; 10;Moreover, the results of the study provide empirical evidence for the advantages of voluntary web-based disclosure. The results highlight the importance to companies and regulators of understanding the benefits of using the website as a means of information disclosure. The regulators in MENA countries can rely on these results to establish suitable policies to improve the quality of web-based disclosure. The regulators need also to put in rules in relation to the online disclosure. In fact, an understanding of web-based disclosure is important for regulators and companies. Given the positive effect of online disclosure (the reduction of the cost of debt), knowledge about the economic consequences of web-based disclosure would enable companies in the MENA region to optimize their online disclosure policies. Originality/value This study, added to the existing literature by examining the consequences of online disclosure practices in MENA countries. Most previous studies conducted in this region were limited to analyzing the determinants of the company’s web-based disclosure. This paper would extend the literature on the online disclosure practices by investigating the association between these practices and the cost of debt in a developing economics: the MENA region. Previous studies were limited to testing this association only in developed countries.

Exploring the potentials of clawbacks to check earnings management practices and enhance financial reporting quality: perceptions from the UAE

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Kahkashan Mahmood ◽  
Yasser Barghathi ◽  
Alhashmi Aboubaker Lasyoud
Keyword(s):  
Earnings Management ◽  
United Arab Emirates ◽  
Financial Reporting ◽  
Management Practices ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Firm Level ◽  
Content Type ◽  
Set Up ◽  
The Impact

Purpose For investors to wholeheartedly entrust their finances to the supposed executives, there is the need to set up policies to checkmate the excesses of such executives, hence clawback policy. This study aims to explore the perceptions of professionals regarding the impact of clawback provisions on earnings management (EM) and financial reporting quality in the context of the United Arab Emirates (UAE). Design/methodology/approach The application of a qualitative approach in an EM is of great significance in this study. For convenience, perceptions of the professionals were collected through semi-structured face-to-face interviews, internet forums and telephone conversations from which the data were initially transcribed and analyzed using thematic analysis. Findings The findings of the study indicate that clawbacks will have a significant impact on EM and financial reporting quality, and apart from this, other firm-level factors have also been supporting clawbacks. Practical implications EM has been a widespread practice; this research may potentially assist directors and regulatory bodies to comprehend factors that should be considered to reduce it. It may also provide practical insights from professionals regarding clawbacks and their bearing on EM and the quality of financial information from an emerging economy perspective. Originality/value A significant gap in the contemporary literature regarding the impact of clawback provisions on EM and financial reporting quality has been filed by this work, in the context of the UAE economy. Consequently, it provides a great insight into the effect of clawback in a business setting and how it can help checkmate the excesses of company executives.

Market reaction to open innovation announcements

2018 ◽  
Vol 21 (1) ◽  
pp. 142-156 ◽  
Author(s):  
Dawid Szutowski
Keyword(s):  
Open Innovation ◽  
Information Disclosure ◽  
The European Union ◽  
Content Type ◽  
Service Companies ◽  
Significant Difference ◽  
Short And Long Term ◽  
The Impact ◽  
Positive Effect

Purpose Open innovation is of crucial importance for all companies operating in the economics of widely distributed knowledge. However, the effects of its disclosure remain largely uncharted in the case of service companies. Therefore, the purpose of this paper is to measure the impact of open innovation announcements on the market value (MV) of service enterprises. Design/methodology/approach The research covered 398 open innovation announcements released by service companies. It was conducted in the whole of the European Union in the period February 2011-December 2016. The data were analysed in the short and long term with the use of event-study and buy-and-hold methods. Findings The results indicated the significant positive effect of open innovation disclosure in both short and long term. At the same time, the market was not able to immediately fully value the information in the short run and tended to overestimate the positive effect of the innovation announced. No significant leakage and dissemination effects were observed prior to the announcement. There was no significant difference in the magnitude of positive and negative reactions to the releases. Practical implications From the point of view of business practice the research proved the benefits of information disclosure and supported the long-term planning. From the investors’ viewpoint, it signalled the small risk of significant fluctuations resulting from aggressive trading prior to the announcement and unwinding part of the acquired position afterwards. Originality/value The paper attempts to fulfil the research gap on the impact of the announcements on open innovation on the MV of companies.

The role of discretionary pension accruals in earnings management

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Su-Jane Hsieh ◽  
Yuli Su ◽  
Chun-Chia Amy Chang
Keyword(s):  
Earnings Management ◽  
Pension Plans ◽  
Defined Benefit ◽  
Pension Accounting ◽  
Estimation Errors ◽  
Content Type ◽  
Significant Difference ◽  
Pension Costs ◽  
The Impact ◽  
Aggregate Measure

PurposeManagers of defined-benefit (DB) firms have considerable discretion in deriving pension costs and flexibility in cash contributions to pension plans. Pension accruals occur when cash contributions differ from pension costs. The manipulable nature of pension costs and cash contributions allows managers of DB firms to manipulate pension accruals to achieve their desired earnings. We study whether DB firms with earnings management attributes (referred to as suspect DB firms) used more discretionary pension accruals (DPA) than non-suspect DB firms, especially after the passage of Sarbanes-Oxley (SOX).Design/methodology/approachThe authors develop an aggregate measure of DPA to capture overall earnings management in pension accounting. They then employ a multivariate regression model to study whether the suspect DB firms engage in more DPA than non-suspect firms and to assess the impact of SOX on DPA for all DB firms and for suspect DB firms.FindingsThe authors find evidence that suspect firms inflate DPA to achieve their earnings goals and also that all DB firms and the suspect firms use more DPA in the post-SOX era compared to the pre-SOX period. In contrast, they observe no significant difference in real activities earnings management (REM) between suspect and non-suspect firms. In addition, neither the entire sample of DB firms nor the suspect firms display a significant change in REM after SOX.Research limitations/implicationsThe samples in the study are limited to firms with defined pension plans; thus, the findings cannot be generalized to all firms. In addition, as in other empirical studies relying on models to estimate earnings management proxies, this study inherits estimation errors from Jones and Roychowdhury's models. Consequently, the impact of these estimation errors cannot be ruled out.Practical implicationsThe empirical findings of the study appear that instead of deterring DB firms from engaging in pension accruals earnings management, enacting the stringent anti-fraud SOX prompts these firms to rely more on accrual-based discretionary pension rather than switch to real activities manipulation to manage earnings.Originality/valueWhile many prior studies focus on the impact of managing individual pension assumptions on earnings, the authors study overall earnings management in pension accounting by developing a model to derive an aggregate measure of pension earnings management.

Performance of shariah-compliant firms and non-shariah-compliant firms in the MENA region

2016 ◽  
Vol 7 (4) ◽  
pp. 268-281 ◽  
Author(s):  
Omar Farooq ◽  
Amal Alahkam
Keyword(s):  
United Arab Emirates ◽  
Stock Price ◽  
Statistical Significance ◽  
Ordinary Least Squares ◽  
Business Networks ◽  
Least Squares Regression ◽  
Sampling Errors ◽  
Mena Region ◽  
Content Type ◽  
The Impact

Purpose This paper aims to document the relative performance of non-financial shariah-compliant firms and non-financial non-shariah-compliant firms in the MENA (Morocco, Egypt, Saudi Arabia, United Arab Emirates, Jordan, Kuwait and Bahrain) region during the period between 2005 and 2009. Design/methodology/approach This paper uses pooled ordinary least squares regression analysis to document the effect of shariah compliance on stock price performance in the MENA region on a sample of non-financial firms that consists of shariah- and non-shariah-compliant firms. Findings Using market-adjusted returns as a proxy for performance, this paper shows that shariah-compliant firms underperform non-shariah-compliant firms. The results also show that underperformance of shariah-compliant firms holds in the civil law and in the common law countries. Interestingly, this paper also shows that difference between the performance of shariah-and non-shariah-compliant firms disappears during the crisis period. Research limitations/implications This paper argues that the characteristics of shariah-compliant firms are such that these firms are at a disadvantage relative to their non-shariah-compliant counterparts. For example, high leverage of their counterpart firms can act as a disciplining mechanism and positively affect performance of these firms. Similarly, high account receivables and high cash allow non-shariah-compliant firms to make more effective business networks than shariah-compliant firms and fund large capital expenditures. Consequently, shariah-compliant firms underperform non-shariah-compliant firms. This study’s results, however, should be read with caution, as they are mainly based upon the performance of large volume, statistical significance, sampling errors and possible labeling miss-specification. Further research on this topic with different research methodology is essential. Originality/value This paper takes a financial view rather than religious view while highlighting the impact of shariah characteristics on firm performance.

IFRS and accounting quality: legal origin, regional, and disclosure impacts

2016 ◽  
Vol 24 (3) ◽  
pp. 296-316 ◽  
Author(s):  
Ajit Dayanandan ◽  
Han Donker ◽  
Mike Ivanof ◽  
Gökhan Karahan
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Common Law ◽  
Civil Law ◽  
Discretionary Accruals ◽  
Income Smoothing ◽  
Content Type ◽  
The World ◽  
The Impact

Purpose The purpose of this study is to examine whether the quality of financial reporting has improved after the adoption of International Financial Reporting Standards (IFRS) in Europe and across the world. The study investigates the impact of IFRS on income smoothing and earnings management in different geographic regions under different legal origins and disclosure environments. Design/methodology/approach To measure income smoothing in the pre- and post-IFRS periods, the authors use the coefficient of variation and the panel unit root model proposed by Im et al. (2003) for testing whether net income is stationary throughout the sample period. The study uses a dynamic panel estimation framework, as it captures the dynamics of IFRS on discretionary accruals efficiently. Discretionary accruals are used to measure earnings management. Findings The results suggest that the adoption of high quality standards, such as IFRS, reduces income smoothing and earnings management. In addition, the study finds that earnings management has decreased in the post-IFRS period, in particular, for French and Scandinavian civil law countries, but not for German civil law countries and common law countries. The latter can be explained by the fact that common law countries have strong investor protection laws, strict law enforcement and high disclosure levels of financial information. The study also finds empirical evidence that the adoption of IFRS reduces earnings management in countries with high levels of financial disclosure. Overall, the study shows that the adoption of IFRS improved the quality of financial reporting. Originality/value This study is useful for accounting standard setters across the world, including those countries that have not yet decided to adopt IFRS. The study contributes to the literature by examining the adoption of IFRS in income smoothing and earnings management under different legal regimes and disclosure environments by using advanced empirical methodologies.

scholarly journals Does the quality of voluntary disclosure constrain earnings management in emerging economies? Evidence from Middle Eastern and North African banks

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rami Ibrahim A. Salem ◽  
Ernest Ezeani ◽  
Ali M. Gerged ◽  
Muhammad Usman ◽  
Rateb Mohammmad Alqatamin
Keyword(s):  
Earnings Management ◽  
Regression Model ◽  
Least Squares ◽  
Voluntary Disclosure ◽  
Developing Economies ◽  
Future Research ◽  
Mena Region ◽  
Content Type ◽  
The Impact

Purpose This study aims to examine the influence of the quality of voluntary disclosure (QVD) on earnings management (EM) amongst a sample of commercial banks in the Middle East and North Africa (MENA) region. Design/methodology/approach Using a sample of 1,060 bank-year observations for the period 2006–2015, this paper developed a three-dimensional framework to measure the QVD, which considers the quantity, spread and usefulness of the information. Furthermore, this study examines the QVD-EM nexus using an ordinary least squares regression model. This technique is supplemented with conducting an instrumental variable regression model and a two-stage least squares model to overcome the potential occurrence of endogeneity problems. Findings The findings suggest that QVD is negatively attributed to EM in the context of MENA banks. The findings also confirm that the quality of financial reporting is enhanced by QVD dimensions that were considered in the framework, leading banks to less engagement in EM practices. In contrast, the influence of the quantity dimension (level) of the disclosed information has an insignificant impact on EM, while the spread and usefulness dimensions of VD are negatively and significantly associated with EM in the region. Research limitations/implications Although the results are robust to various measurements and to the possible occurrence of endogeneity problems, there are a few limitations should be acknowledged, which provides opportunities for future research. For example, the sample size is relatively small due to data accessibility issues. Likewise, the findings of the research might not be appropriate for non-financial sectors. These limitations provide a good opportunity for future studies to expand on the research by covering other developing economies and, thereby, enriching the understanding offered by this study. Practical implications This study offers several implications for bank managers, academics and policymakers. Firstly, it may help managers to appreciate the function and the importance of QVD in mitigating EM. Secondly, for academics, the study provides suggestive evidence on the impact of QVD on EM; however, future research may need to consider the role of morality and ethical behaviour across different environments in reducing excessive risk-taking and constraining earnings manipulation. Finally, it provides insights for policymakers and regulators to develop a framework or guidance that can help banks in providing high-QVD in the context of developing economies. Originality/value The study distinctively develops an innovative measurement for QVD using a new multi-dimensional model. This paper also bring new evidence on QVD complexity and its impact on EM practice from an under-researched developing context, namely, the MENA region.

The impact of culture on consumer’s perception of brand identity

2019 ◽  
Vol 11 (2) ◽  
pp. 479-496
Author(s):  
Shiksha Kushwah ◽  
Deep Shree ◽  
Sakineh Rezaei ◽  
Mahim Sagar
Keyword(s):  
United Arab Emirates ◽  
Focal Point ◽  
Brand Identity ◽  
Content Type ◽  
Identity Creation ◽  
Gulf Countries ◽  
Significant Difference ◽  
The Impact ◽  
The Relationship ◽  
Consumer's Perception

PurposeThe purpose of this paper is to study the influence of culture on consumers’ perception of brands, specifically brand identity in Gulf countries (Saudi Arabia, the United Arab Emirates and Qatar), and how brands entering new markets, launching new products or modifying existing brands can gain important insights from this to make the brand culturally acceptable.Design/methodology/approachThis study includes both inductive and deductive approaches. The literature review has been conducted to identity the factors of brand identity and culture, followed by the blending of the factors through Delphi method. The relationship that was identified through qualitative approach was further tested through a quantitative survey (n=1,152). The analysis includes, hypotheses testing using the Kruskal–Wallis test.FindingsThe results of hypothesis testing proved that culture does play a significant role in shaping how consumers perceive brand identity. The Kruskal–Wallis test showed a significant difference across three cultures. Only two constructs that were not ranked significantly different across three cultures were brand as a stance and brand through place and time. Findings of this study supported the culture-specific branding, i.e. Islamic branding in the studied context.Practical implicationsBrand identity can be said to be the focal point of all branding activities. Brand identity creation starts with the starting of the product or services and is passed on through the process of brand communication and is manifested through the brand image formation by customer. Once the brand identity for a brand is created, it is very tough to change it; hence, from the very beginning, marketers have to take care of the brand identity. Thus, the findings of this study can be used by brand managers and marketers to create or modify brand identity according to the culture of the target consumers. These findings could also be incorporated for designing Islamic branding strategy for the studied context.Originality/valueThis research uses both qualitative and quantitative approaches to identify the brand identity and culture variables and subsequently probes the relationship among them. This study would help the brand managers in designing the brand identity for the brand operating or planning to enter in the Gulf countries.

The effect of the financial crisis on the dynamic relation between foreign exchange and stock returns

2018 ◽  
Vol 45 (5) ◽  
pp. 994-1031
Author(s):  
Neveen Ahmed
Keyword(s):  
Financial Crisis ◽  
Stock Returns ◽  
Foreign Exchange ◽  
Stock Prices ◽  
Stock Return ◽  
Mena Region ◽  
Content Type ◽  
Crisis Period ◽  
Dynamic Relationship ◽  
The Impact

Purpose The purpose of this paper is to study the dynamic relationship between foreign exchange and stock returns. Specifically, the authors examine the impact of the 2008 financial crises on the relation between foreign exchange and stock returns in the MENA region. Design/methodology/approach The authors examine the long-run relation between these two variables using VECM and the authors study the volatility behavior of these two variables using the Dynamic VECH–generalized autoregressive conditional heteroskedasticity (GARCH) model. The sample covers the MENA region over the period 2004–2015. Findings The results indicate a regime shift in three countries: Egypt, Tunisia and Morocco. In addition, the results assert asymmetric relation between stock returns and changes in exchange rates during pre-crisis and post-crisis periods. Modeling the volatility of the foreign exchange and stock return and their covariance using VECH–GARCH suggests that the persistence in volatility is more prominent in the crisis/post-crisis period as compared with the pre-crisis period. Finally, the authors also find more significant results for the persistence parameter in the covariance between stock return and foreign exchange in the crisis/post-crisis period as compared with the pre-crisis period. Originality/value To the best of the authors’ knowledge, the studies by Wong and Li (2010) and Caporale et al. (2014) are the only two that have examined the interaction between stock prices and foreign exchange during the recent financial crisis of 2008. To the authors’ knowledge, none of the previous literature examined the impact of financial 2008 crisis on the relation between foreign exchange and stock prices in the MENA.

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