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

Legal origin, economic freedom and earnings management practices: MENA evidence 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 2000­2008, 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 Eastern and North African; MENA. Reference to this paper should be made as follows: Baatour, K. and Ben Othman, H. (2016) `: MENA evidence', Int. J. Accounting, Auditing and Performance Evaluation, Vol. 12, No. 1, pp.1­23. Copyright © 2016 Inderscience Enterprises Ltd. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Accounting, Auditing and Performance Evaluation Inderscience Publishers

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

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Publisher
Inderscience Publishers
Copyright
Copyright © 2016 Inderscience Enterprises Ltd.
ISSN
1740-8008
eISSN
1740-8016
DOI
10.1504/IJAAPE.2016.073892
Publisher site
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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 2000­2008, 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 Eastern and North African; MENA. Reference to this paper should be made as follows: Baatour, K. and Ben Othman, H. (2016) `: MENA evidence', Int. J. Accounting, Auditing and Performance Evaluation, Vol. 12, No. 1, pp.1­23. Copyright © 2016 Inderscience Enterprises Ltd.

Journal

International Journal of Accounting, Auditing and Performance Evaluation – Inderscience Publishers

Published: Jan 1, 2016

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