The Impact of Firm-specific Characteristics and Profitability on Earnings Management: An Empirical Analysis of Firms Listed on Egyptian Stock Exchange

Abstract

The accounting literature has extensively focused on earnings management, with ongoing concerns from practitioners and regulators. Various methods and techniques are employed in earnings management, all tailored to management’s goals. This research aims to investigate the relationship between firm characteristics and earnings management among firms listed on the Egyptian Stock Exchange (EGX), and it also examines the impact of external shocks (2011 revolution, COVID-19  pandemic and currency devaluation). The study sample includes the top 100 most active EGX-listed firms, excluding banks and financial firms due to their distinct financial statement nature and governance requirements. Consequently, the sample comprises 70 firms all over an 11-year period from 2012 to 2022. Using fixed effects multiple regression, the research finds a significant positive relationship between earnings management (measured by discretionary accruals) and the independent variables: financial leverage (measured by debt ratio), firm size (measured by natural logarithm of total assets), efficiency ratio (measured by receivables turnover), and profitability (measured by return on assets). In contrast, cash flow from operations (CFO) and the period currency devaluation shows a significant negative relationship with earnings management. However, profitability (measured by return on equity), liquidity (measured by adding inventory to receivables, subtracting accounts payable, and then dividing by total assets), the period of COVID-19 pandemic, and the period of 2011 revolution exhibit an insignificant relationship with earnings management.