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Real earnings management in public vs private firms in the GCC countries: a risk perspective

Khalid Al-Amri (Sultan Qaboos University, Muscat, Oman)
Saif Al Shidi (Department of Accounting, College of Economics and Political Science, Sultan Qaboos University, Muscat, Oman)
Munther Al Busaidi (Department of Accounting, Sultan Qaboos University, Muscat, Oman)
Serkan Akguc (Department of Finance, King Abdulaziz University, Jeddah, Saudi Arabia)

Journal of Applied Accounting Research

ISSN: 0967-5426

Article publication date: 8 May 2017

Abstract

Purpose

The purpose of this paper is to examine the use of real earnings management by private and public firms in a unique institutional setting, which is the Gulf Cooperation Council (GCC) countries. The paper also compares the level of real earnings management between public and private firms in the GCC area.

Design/methodology/approach

The GCC area is a unique setting to investigate the use of real earnings management because of the low enforcement of reporting standards and supervisory rules, lack of sophisticated financial analysis, specialized media tools and high concentration of capital ownership. The authors use different models of real earnings management proposed by Roychowdhury, 2006, cash flow management, productions cost management and discretionary expenses management to examine the use of real earnings management.

Findings

The paper documents evidence consistent with private and public firms using real earnings management to influence their earnings figures. The paper also shows that the level of real earnings management is higher for private firms compared to public firms when cash flow management and discretionary expenses management models are used. The production cost model results show evidence consistent with public firms only engaging in real earnings management through production cost reduction.

Research limitations/implications

The results of this study might not be applicable to other emerging markets.

Practical implications

The findings of this study should promote a general understanding of firms’ behavior in unique environment such as GCC countries. Regulators in the GCC region should be aware that real earnings management techniques have been used by firms and that extra caution is required when auditing or analyzing the financial information of private and public firms in the GCC market.

Originality/value

This paper contributes to the literature in many aspects. First, it provides additional evidence on the use of earnings management in unique market contexts outside the USA and Europe. The GCC markets share many common characteristics that make them interesting settings to be investigated. Second, this paper adds more evidence on the use of earnings management between public and private firms. In this regard, the paper adds additional evidence in the discussions proposed by Ball and Shivakumar (2005) and Givoly et al. (2010) who use two competing perspectives to investigate earnings quality in public and private firms: the demand hypothesis and the opportunistic behavior hypothesis.

Keywords

Citation

Al-Amri, K., Al Shidi, S., Al Busaidi, M. and Akguc, S. (2017), "Real earnings management in public vs private firms in the GCC countries: a risk perspective", Journal of Applied Accounting Research, Vol. 18 No. 2, pp. 242-260. https://doi.org/10.1108/JAAR-11-2014-0124

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited