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Earnings management with the absence of income tax avoidance motivation: evidence from pre-, during, and post- global financial crisis

Osama Atayah, Hazem Marashdeh and Allam Hamdan

Asian Journal of Accounting Research, 2024, vol. 9, issue 2, 153-168

Abstract: Purpose - This study aims to examines both accrual and real-based earnings management (EM) behavior of listed corporations in tax-free countries during different economic situations. It also addresses the link between firm- and country-level determinants of accrual and real-based EM and explores economic conditions' influence on these determinants. Design/methodology/approach - The study examines 1,608 firm-years, covers sixteen years (2004–2019), clustered into three periods according to the global financial crisis (GFC): four years prior (2004–2007), two years during (2008–2009), and ten years post the GFC (2010–2019). We employ the modified Jones model (performance-matched) developed by Kothariet al.(2005) to measure the accrual-based EM (positive and negative discretionary accrual EM) and the three levels model for Dechowet al.(1998) to measure the real-based EM (cash flow from operating, discretionary expenses and abnormal production cost). Findings - The study finds a significant increase in EM practices in the listed corporations in tax-free countries during the economic downturn. These corporations are found to understate their earnings during the economic stress period. Simultaneously, the firm-level determinants of EM practices were at the same level of significance during different economic conditions in accrual-based EM. In contrast, the country-level EM determinants vary based on the economic conditions. Originality/value - Financial reports' users gain a deep understanding of the quality of financial reports in the context of tax-free country. And, the study outcomes inspire policymakers to develop relevant legislation to mitigate financial reports' risk and adequately protect the financial reports' users.

Keywords: Real earnings management; Accrual earnings management; Earnings quality; Tax-free countries; Investor protection; Global financial crisis (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ajarpp:ajar-04-2023-0130

DOI: 10.1108/AJAR-04-2023-0130

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