What do we know about real earnings management in the GCC?

Alghemary, Mahmoud, Al-Najjar, Basil ORCID: https://orcid.org/0000-0003-2753-7142 and Polovina, Nereida ORCID: https://orcid.org/0000-0001-9304-3402 (2023) What do we know about real earnings management in the GCC? Journal of Accounting in Emerging Economies. ISSN 2042-1168

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Abstract

Purpose The authors empirically investigate the association between acquisition, ownership structure and accrual earnings management (AEM) on real earnings management (REM) using Gulf Cooperation Council (GCC)-listed firms' context. Design/methodology/approach The authors' sample consists of 1,892 firm-year observations for the period from 2007–2017, and the authors adopt a panel data approach in investigating the interrelationships in this study. The authors employ different econometrics approach to test the authors' hypotheses. Findings The findings reveal that acquiring companies engage more in AEM if compared to REM. In terms of ownership structure, institutional ownership and state ownership mitigate the engagement in REM, whereas foreign ownership is found to be an ineffective mechanism in reducing engagement in REM. The authors report similar findings on ownership structure for AEM. The authors also find that the GCC firms engage more in REM when the firms engage in AEM, suggesting a complementary relation between these two earnings management techniques. These findings are robust after controlling for different aspects including any endogeneity issue in the authors' models. Originality/value The authors' research highlights the importance of understanding REM and AEM dynamics in GCC context. Also, the authors' findings on ownership structure suggest that GCC-listed firms can gain from institutional and state ownership which restricts earnings management, improving firm transparency and subsequently impacting firm performance.