The Influence of Leverage and Profitability on Earnings Quality: Jordanian Case

Abstract

The fundamental target of financial accounting is to provide information helpful to investors in making forecasting about firms performance. The evolution of income reporting as the essential source for investor decision making has been well authenticated and income reporting helps economic society in a different ways. (Schroeder, et al., 2014) The present study aims to survey the influence of leverage measured by debt ratio separately on Earnings Quality, and the influence of profitability measured by return on asset (ROA) separately on Earnings Quality, and finally the influence of leverage and profitability together on Earnings Quality.The paper covered the period from 2011 to 2015, and employed some statistical techniques on all listed Islamic Banks at Amman Stock Exchange (ASE) to revealed that there is a significant influence of debt ratio on the listed Jordanian Industrial companies' Earnings Quality, and there is a significant influence of return on asset (ROA) on the listed Jordanian Industrial companies' Earnings Quality, Finally, there is a significant influence of leverage and profitability on the listed Jordanian Industrial companies' Earnings Quality

Reputation to the vicious circle of earnings quality and financial performance

“…Likewise, the results in a study of Warrad (2017) supported the causal link from return on asset as an indicator of financial performance to the quality of earnings; and another recent study took a similar line of thinking, revealing that companies with high financial performance more possibly satisfy their stakeholder's expectations without manipulating their true earnings (Du & Shen, 2018). However, the quality of earnings goes after the financial performance and is a driver of future organizational reputation (Hammond & Slocum, 1996).…”

“…The interplay between the quality of publicly disclosed earnings and financial performance or value has broadly been discussed in previous research (e.g. Latif et al, 2017;Warrad, 2017;Huynh, 2018;Du & Shen, 2018). Those scholars have only focused on the causal interactions from the quality of earnings to financial performance or in the opposite influential direction.…”

“…That tendency argued that a higher quality of reported earnings is supposed to allow companies to win public confidence and gain goodwill, so be able to achieve competitive advantages and superior subsequent performance. On the contrary, the second stream of research suggested that, companies suffering poor and weak financial performance feel more pressure to manage earnings by manipulating their financial accounting procedures resulting in a poorer quality of reported earnings (Kinney & McDaniel, 1989;Dechow et al, 1995;Lee et al, 2006;Dechow et al, 2010;Warrad, 2017). Companies with currently positive financial performance have more resources to spend for building and improving the future reputation that enables them to behave more ethically by disclosing more real earnings (Roberts & Dowling, 2002;Blajer-Gołębiewska & Kozłowski, 2017).…”

Profitability of Coal Mining Sectors in IDX: Effects of CSR Disclosure, Leverage and Size

“…In Pakistan, (Bhatti, 2011) revealed that the level of debt would encourage profitability. Meanwhile, in a study at the Amman Stock Exchange, Jordan, by (Warrad, 2017) also showed the effect of ratio of leverage debt on the profitability of industrial companies. However, research in Thailand by (Vithessonthi and Tongurai, 2015) leverage caused different influences on small and large firms where the small firms were negatively influenced and large companies vice versa.…”

The Effect of Debt Level, Sales Volatility, and Temporary Differences to Earnings Quality.

“…Therefore, the earnings quality becomes important. Earnings quality is an indicator of earnings disclosure ability to predict cash flow in the future (Penman, 2001;Warrard, 2017). Low earnings quality means that earnings can not accurately predict future cash flows.…”