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Earnings management and investor protection during the COVID-19 pandemic: evidence from G-12 countries

Heba Ali (Department of Accounting and Finance, Faculty of Management Technology, German University in Cairo, Cairo, Egypt)
Hala M.G. Amin (Department of Accounting and Finance, Faculty of Management Technology, German University in Cairo, Cairo, Egypt)
Diana Mostafa (Department of Accounting and Finance, Faculty of Management Technology, German University in Cairo, Cairo, Egypt)
Ehab K.A. Mohamed (Department of Accounting and Finance, Faculty of Management Technology, German University in Cairo, Cairo, Egypt)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 13 January 2022

Issue publication date: 1 September 2022

2281

Abstract

Purpose

The purpose of this paper is to examine the inter-relations among the strength of investor protection institutions, earnings management (EM) and the COVID-19 pandemic.

Design/methodology/approach

As a proxy for EM, the authors use discretionary accruals measure, estimated using the modified Jones model (1991). As a proxy for the strength of investor protection institutions, the study uses the Investor Protection Index, extracted from the Global Competitiveness Reports. The sample consists of 5,519 firms listed in the Group of Twelve countries during 2015–2020.

Findings

The study shows that firms tend to engage less in EM during the pandemic period. The authors also find a significantly negative relation between the strength of investor protection institutions and EM practices, and interestingly, this negative relation was found to be more pronounced during the pandemic period.

Research limitations/implications

For investors and practitioners, the findings help get insights into the behavior of firms in response of the pandemic shock in countries with solid institutional and legal protection. For policymakers, the findings reaffirm the critical role that institutional incentives and reforms can play, in influencing firms to exert more efforts to promote their financial reporting quality.

Originality/value

To the best of our knowledge, the study is one of the first attempts to examine the link between EM practices and investor protection during the COVID-19 pandemic. The findings extend both the literature on the role of institutional factors in promoting the earnings quality and the literature on COVID-19’s effect on firm performance and practices.

Keywords

Citation

Ali, H., Amin, H.M.G., Mostafa, D. and Mohamed, E.K.A. (2022), "Earnings management and investor protection during the COVID-19 pandemic: evidence from G-12 countries", Managerial Auditing Journal, Vol. 37 No. 7, pp. 775-797. https://doi.org/10.1108/MAJ-07-2021-3232

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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