An Empirical Investigation of the Determinants of Earnings Management in Pakistani Manufacturing Firms
DOI:
https://doi.org/10.70670/sra.v4i1.2515Keywords:
Abnormal Accruals, Real, Discretionary Expense, Production Cost, Earnings ManagementAbstract
Purpose – The purpose of this paper is to underline the determining factors motivating firms to indulge in earning management practices, compromising financial reporting quality.
Design/methodology/approach – Data from 168 manufacturing firms from the Pakistan stock exchange were extracted during 2010-2021. To create dependent variable GMM approach is utilized, whereas the panel data approach of fixed/random is used to estimate the reported results.
Findings – Findings of this study imply that a firm’s size and profitability are significant determinants of earnings management proxies i.e., accruals as well as real earnings management. Whereas market growth is negatively significant with abnormal accruals and abnormal cash flow from operations. Leverage is found to be negatively significant with abnormal accruals and abnormal cash flow from operations. Dividend per share is negatively significant with abnormal discretionary expense and abnormal production cost. And tax payments negatively impact the accruals while insignificant with the rest of the three proxies.
Practical implications –The findings of this study will draw policymakers' attention to implementing stringent regulations and oversight mechanisms that promote transparency and accuracy in financial reporting, such as increased disclosure requirements, enhanced auditor independence, and more robust enforcement mechanisms. Policymakers should also promote greater financial literacy among investors and the public to enhance their ability to assess the quality of financial reporting and identify potential instances of earnings management.
Originality/ value – Studying the determinants of earnings management in Pakistan provides insights into the unique factors that may drive earnings management practices in a developing country context. It can help to inform policy and investment decisions in this specific setting. And contribute to the wider literature on earnings management and financial reporting quality.
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