Abnormal real activities, meeting earnings targets and firms' future operating performance: evidence from an emerging economy

Abstract

PurposeThis paper aims to examine the extent to which real earnings management (REM) is used in Jordan to meet zero or previous year's earnings, and how this impacts the subsequent operating performance of Jordanian firms.Design/methodology/approachThe study used a sample of 98 Jordanian listed firms over the 2010–2018 period. To test the research hypotheses, which are formulated in accordance with both, agency theory and signalling theory, multivariate regression is performed using a pooled OLS estimation. Additionally, a two-step dynamic generalised method of moment (GMM) model has been estimated to address any concerns regarding the potential occurrence of endogeneity issues.FindingsThe results show that Jordanian firms that meet zero or last year's earnings tend to exhibit evidence of real activities manipulations. More specifically, suspect firms show unusually low abnormal discretionary expenses and unusually high abnormal production costs. Further, consistent with the signalling earnings management argument, the authors find that abnormal real-based activities intended to meet zero earnings or previous year's earnings potentially improve the subsequent operating performance of Jordanian firms. This implies that REM is not totally opportunistic, but it can be used to enhance the subsequent operating performance of Jordanian firms. Our findings are robust to alternative proxies and endogeneity concerns.Practical implicationsThe findings have several implications for policymakers, regulators, audit professionals and investors in their attempts to constrain REM practices to enhance financial reporting quality in Jordan. Managing earnings by reducing discretionary expenses appeared to be the most convenient way to manipulate earnings in Jordan. It provides flexibility in terms of time and the amount of spending. The empirical evidence, therefore, reiterates the crucial necessity to refocus the efforts of internal and external auditors on limiting this type of manipulation to reduce the occurrence of REM activities and enhance the subsequent operating performance of listed firms in Jordan. Drawing on Al-Haddad and Whittington (2019), the evidence also urges regulators and standards setters to develop a more effective enforcement mechanism for corporate governance provisions in Jordan to minimise the likelihood of REM incidence.Originality/valueThis study contributes to the body of the accounting literature by providing the first empirical evidence in the Middle East region overall on the use of REM to meet zero or previous year earnings by Jordanian firms. Moreover, the study is the first to empirically examine the relationship between REM and Jordanian firms' future operating performance.

Do multiple directorships stimulate or inhibit firm value? Evidence from an emerging economy

“…In addition, the mean (median) of the board size is 8 (9), respectively, exhibiting the optimal size according to Lipton and Lorsch (1992). The mean (median) of board independence is 0.42 (0.44), respectively, compared with the 0.34 (0.28) documented by Alhaddad et al (2021), it can be concluded that Jordanian listed firms are becoming more independent than before. CEO-duality has a mean of 16%, indicating that about 84% of Jordanian firms are following the recommendations of the 2017 Jordanian Corporate Governance Code and separate the roles of chief executive officer and chairman.…”

“…In addition, the mean (median) of the board size is 8 (9), respectively, exhibiting the optimal size according to Lipton and Lorsch (1992). The mean (median) of board independence is 0.42 (0.44), respectively, compared with the 0.34 (0.28) documented by Alhaddad et al (2021), it can be concluded that Jordanian listed firms The firm size ranges from 5.5 to 9.25, with a mean of 7.40, which is quite similar to the 7.79 reported in India by Raithatha and Ladkani (2022). Market to book ratio has a mean (median) of 1.38 (1.52), while Market capitalization ranges from 4.87 to 9.14.…”

“…The board should set the corporation’s standards and values and confirm its obligations to shareholders and others are well perceived and satisfied. Thus, the quality of board decisions eventually affects the firm value; better management monitoring encourages managers to act in the best interests of the shareholders and reduces the agency conflict between managers and shareholders (Alhaddad et al , 2021; Gerged and Agwili, 2020; Masli et al , 2022; Mori and Charles, 2019).…”

“…Jordan is a developing country with sufficient data for us and can give a frame to potentially gain more insights for Jordan and many other developing countries with even less information (Al-Haddad et al , 2019; AlHaddad et al , 2021; Gerged et al , 2021a). The Jordanian capital market has the advantage of having almost half of its market capitalization comprised foreign ownership (Gerged, 2021).…”

“…This suggests that any failures in implementing corporate governance standards in Jordan may have severe consequences far beyond the Middle Eastern region and developing countries. For this, we believe that Jordan provides a unique setting for conducting this study (AlHaddad et al , 2021). Such characteristics allow our study to offer relevant insights into corporate governance implementations in other emerging countries, especially with the increasing integration into the world’s economies (Elmghaamez et al , 2020; Salem et al , 2020; Gerged et al , 2021b).…”