The accounting literature has extensively focused on earnings management, with ongoing concerns from practitioners and regulators. The aim of this research is to investigate the factors affecting earnings management among firms listed on the Egyptian Stock Exchange (EGX), while accounting for the impact of external shocks (2011 revolution, COVID-19 pandemic and currency devaluation) that occurred during the study period. The study sample includes 70 non-financial firms from the top 100 most active firms listed in EGX, analyzed all over an 11-year period from 2012 to 2022. Using fixed effects multiple regression, findings reflect a significant positive relationship between earnings management and the independent variables: financial leverage, firm size, receivables turnover, ROA and the period of currency devaluation. In contrast, operating cash flow shows a significant negative relationship with earnings management. However, ROE, liquidity, the period of COVID-19 pandemic, and the period of 2011 revolution exhibit an insignificant relationship with earnings management. In addition, results of the comparative analysis shows that currency devaluation has a significant effect.
Earnings management operates at the intersection of accounting methods, financial choices, and corporate oversight. It represents a complex tactic used by management to influence reported profits through a variety of accounting techniques. The use of accrual-based accounting has facilitated the growth of earnings management (
Earnings management is a complex practice used by management to manipulate reported earnings through various accounting methods. This can involve real earnings management or accrual earnings management (
Leverage refers to the amount of debt a company uses to finance its operations. Some studies indicated that firms with high levels of leverage frequently engage in earnings management (
Firm size is a critical factor influencing financial reporting. Some studies suggest a negative relationship (
Studies have shown mixed results regarding the association between profitability and earnings management (
The sample includes 70 non-financial firms listed in EGX over an 11-year period from 2012 to 2022.
The modified Jones model (1995) is used to estimate discretionary accruals.
Total accruals are calculated as:
Non-discretionary accruals are calculated as:
Discretionary accruals (DA) are calculated as:
| Variables | Measurement | Source |
|---|---|---|
| Leverage | Debt ratio = Total debt / Total assets | ( |
| Firm's Size | Natural Log of Total assets | ( |
| Profitability | ROE = Net income / Equity; ROA = Net income / Total assets | ( |
| Liquidity position | [(Receivables + Inventory) - Payables] / Total assets | ( |
| Efficiency Ratio | Receivables turnover = Sales / Receivables | ( |
| Operating Cash Flow | OFC = Cash flow from operations / Total assets | ( |
| Variable | Mean | Median | Max | Min | SD |
|---|---|---|---|---|---|
| DAC | 0.003 | -0.005 | 0.650 | -1.151 | 0.135 |
| FLEV | -0.511 | -0.479 | 0.344 | -2.401 | 0.351 |
| FSIZE | 14.407 | 14.533 | 18.748 | 10.13 | 1.74 |
| ROA | 0.059 | 0.054 | 0.483 | -1.316 | 0.121 |
| DAC | Coef. | St.Err. | t-value | p-value |
|---|---|---|---|---|
| FLEV | 0.060 | 0.025 | 2.41 | 0.019** |
| FSIZE | 0.025 | 0.009 | 2.61 | 0.011** |
| ROA | 0.789 | 0.102 | 7.76 | 0.000*** |
| OFC | -1.024 | 0.068 | -14.96 | 0.000*** |
| Currency_flg | 0.022 | 0.007 | 3.05 | 0.003*** |
R-squared = 0.865; *** p<0.01, ** p<0.05, * p<0.1
This study investigates the factors affecting earnings management among 70 non-financial firms listed in EGX. Findings indicate that 86.5% of variations in earnings management practices is explained by the firm characteristics and external shocks. The research identifies a significant positive relationship between earnings management and financial leverage, firm size, receivables turnover, ROA, and currency devaluation.