This is a repository copy of The impact of audit quality on real and accrual earnings management around IPOs.

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Purpose The purpose of this study is to examine the relation between related party transactions and both accrual and real earnings management practices in Jordanian industrial public-listed companies, taking into account the uniqueness of the Jordanian company ownership structure. Design/methodology/approach Data were collected from Jordanian industrial public-listed companies for the period 2011–2017. Accrual earnings management is measured by using the modified Jones model, whereas real earnings management and related party transactions are measured by using relevant proxies. A regression model is developed and used to assess the relation between related party transactions and earnings management, taking into account the effects of ownership concentration, family ownership and institutional ownership levels of the companies involved. Findings Accrual earnings management is negatively associated with related party transactions. Regarding the role of ownership structure, the presence of institutional investors is positively associated with using both related party transactions and real earnings management, whereas ownership concentration plays an efficient role to mitigate the use of both accrual earnings management and related party transactions. No statistically significant relations between real earnings management and related party transactions exist. Practical implications This study has direct practical implications for the Jordanian regulatory authorities to enact regulations to limit the misuse of related party transactions and earnings management transactions and ensure sufficient monitoring of these transactions because of their prevalence. Jordanian companies should also enhance their corporate governance systems to better approve and monitor such transactions, including enhancing the role of independent and non-controlling board members in this process. Originality/value Related party transactions are considered as a major concern of financial reporting quality in developed countries, and such transactions are found to be relatively more problematic in developing countries, where corporate governance is generally weak, and there is limited disclosure and transparency in financial reporting. From this perspective, this study is one of the very few studies in developing countries that explore the issue of related party transactions and their association with earnings management practices. Thus, the findings of this study can arguably be to some extent generalized to other developing country contexts, because of relatively similar business environment conditions, and therefore potentially fill a gap represented by the paucity of similar studies in developing countries.

This study examines the difference between high and low concentrated markets in using accrual and real earnings management and the role of corporate governance in mitigating such activities across the two types of markets. We find that firms operating in concentrated markets use more accrual and real earnings management compared to those in non-concentrated markets. Furthermore, we find evidence that corporate governance, in the form of quality board characteristics, is more effective in mitigating earnings management in non-concentrated markets. In contrast, corporate governance in concentrated markets drives managers to substitute accrual with real earnings management as the latter is less easily detectable and its long-term negative consequences on firm value are likely to be mitigated by the higher competitive power of firms in concentrated markets. The findings of this study are potentially useful to regulators in enhancing the legitimacy of corporate governance in concentrated markets.

While earnings management around IPOs has been researched in a number of settings, there has been a relative absence of work that analyses the impact of the regulatory environment on such activities. We find that the regulatory environment does impact the real and accrual earnings management activities of IPO firms. Our results show that IPO firms listing on the lightly regulated UK Alternative Investment Market (AIM) have higher (lower) levels of accrual‐based and sales‐based (discretionary expenses‐based) earnings management around the IPO than firms listing on the more heavily regulated Main market in the UK.