Abnormal Real Activities, Meeting Earnings Targets and Firms' Future Operating Performance: Evidence from an Emerging Economy

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dc.cclicenceCC-BY-NCen
dc.contributor.authorAl-Haddad, Lara
dc.contributor.authorWhittington, Mark
dc.contributor.authorGerged, Ali Meftah
dc.date.acceptance2021-06-28
dc.date.accessioned2021-06-29T14:03:32Z
dc.date.available2021-06-29T14:03:32Z
dc.date.issued2021-07-28
dc.descriptionThe file attached to this record is the author's final peer reviewed version. The Publisher's final version can be found by following the DOI link.en
dc.description.abstractThis 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. The study used a sample of 98 Jordanian listed firms over the 2010-2018 period. To test our 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. Our 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, we 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. Our 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. Our 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 & Whittington (2019), our 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. This study contributes to the body of 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, our study is the first to empirically examine the relationship between REM and Jordanian firms’ future operating performance.en
dc.funderNo external funderen
dc.identifier.citationAl-Haddad, L.M., Whittington, M., and Gerged, A.M. (2021) Abnormal Real Activities, Meeting Earnings Targets and Firms' Future Operating Performance: Evidence from an Emerging Economy. Journal of Accounting in Emerging Economies, Forthcoming.en
dc.identifier.doihttps://doi.org/10.1108/JAEE-07-2020-0161
dc.identifier.issn2042-1168
dc.identifier.urihttps://dora.dmu.ac.uk/handle/2086/21066
dc.language.isoenen
dc.peerreviewedYesen
dc.publisherEmeralden
dc.researchinstituteCentre for Research in Accountability, Governance and Sustainability (CRAGS)en
dc.subjectAccrual earnings managementen
dc.subjectEarnings Targetsen
dc.subjectFuture operating performanceen
dc.subjectJordanen
dc.titleAbnormal Real Activities, Meeting Earnings Targets and Firms' Future Operating Performance: Evidence from an Emerging Economyen
dc.typeArticleen

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