Legal origin, economic freedom and earnings management practices: MENA evidence

Kais Baatour and Hakim Ben Othman

International Journal of Accounting, Auditing and Performance Evaluation, 2016, vol. 12, issue 1, 1-23

Abstract: This paper investigates the impact of the legal system and economic freedom on earnings management practices through both real earnings management and accruals manipulation. Based on Roychowdhury (2006), we examine real earnings management through abnormal cash flow from operations, abnormal discretionary expenses and abnormal production costs. We use the cross-sectional Jones model to approximate accrual-based earnings management. Based on a sample of 1,569 firm-year observations across 12 Middle Eastern and North African (MENA) countries over 2000-2008, we find evidence that managers in countries with code law legal origin are more likely to engage in real earnings management. However, no significant association is found between the origin of the legal system and accruals manipulation. We find also no association between economic freedom and real earnings management. Moreover, our results indicate that accrual-based earnings management is positively associated with the level of economic freedom.

Keywords: real activities management; accruals manipulation; legal system origin; investor protection; economic freedom; Middle East; North Africa; MENA countries; accrual-based earnings management; cash flows; discretionary expenses; production costs; code law countries. (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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