Does oil price uncertainty affect earnings management? Evidence from GCC markets

Abstract

Purpose

Since it is believed that economic growth in oil-rich countries is highly influenced by oil price movements, this study aims to explore the relationship between oil price volatility (uncertainty) and earnings-management decisions.

Design/methodology/approach

Financial data from oil-exporting countries were used to explore the relationship between oil price volatility and earnings-management decisions. The study used univariate and multivariate analysis. The modified Jones model is the proxy accrual earnings management. Further, the standard deviation of daily oil price returns is used to proxy annualised oil price volatility.

Findings

The results show that there is an association between oil price volatility and accrual earnings management. Specifically, there is a positive and significant relationship between negative accruals and oil price volatility, indicating that firms are inclined to conduct income-decreasing earnings management in periods of high oil price volatility.

Research limitations/implications

This study’s findings have important implications for regulators and investors because they indicate that the uncertainty of oil price volatility has an influence on earnings quality in oil-dependent economies. This is especially important considering the ongoing debate on transparency issues.

Originality/value

To the best of the authors’ knowledge, this study is the first to investigate the relationship between oil prices volatility and earning management behaviour for non-financial firms. Further, the study uses unique data of oil-dependent economies.

Citation

Bugshan, A., Alnahdi, S., Ananzeh, H. and Alnori, F. (2022), "Does oil price uncertainty affect earnings management? Evidence from GCC markets", International Journal of Energy Sector Management, Vol. 16 No. 6, pp. 1240-1258. https://doi.org/10.1108/IJESM-05-2021-0003