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Article
Publication date: 7 November 2019

R.P. Sitanggang, Yusuf Karbhari, Bolaji Tunde Matemilola and M. Ariff

The purpose of this paper is to investigate whether audit quality is associated with real earnings management in the UK.

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Abstract

Purpose

The purpose of this paper is to investigate whether audit quality is associated with real earnings management in the UK.

Design/methodology/approach

The authors apply the panel fixed effects method that controls for heterogeneity across firms to investigate whether audit quality is related to real earnings management for a large sample of UK manufacturing companies for the period 2010–2013. The authors utilized three proxies to measure real earnings management and two proxies to measure audit quality.

Findings

The results provide evidence that audit fees are negatively related to abnormal operating cash flows. Conversely, audit fees are positively related to abnormal discretionary expenses. Besides, audit quality proxies show insignificant relationship with abnormal production costs and real earnings management index. Overall, the study finds partial evidence of significant relationship between audit quality and real earnings management.

Research limitations/implications

These results are important subject to the adequacy of the indicators of real earnings management and audit quality. Like previous research works that mostly focus on upward earnings management, the authors do not address the question of whether and how firms take real actions to manage earnings downwards in certain contexts.

Practical implications

The findings inform monitoring bodies that the imposition of higher levels of audit quality may result in unintended consequences. Therefore, monitoring bodies, such as audit committees, should consider the implication of imposing higher quality auditing, which may drive firms to potentially value-decreasing real earnings management practices. Managers should curtail real earnings management practices, especially abnormal operating cash flow, because attempt to use higher-quality auditors to mitigate such practice may destroy firm value. Also, managers’ employment may be threatened due to the potential deterioration of firm value caused by using higher-quality auditors to mitigate managers’ real earnings management practices. Moreover, shareholders are informed of the potential detrimental effects of imposing higher levels of audit quality which may lower the value of their investments.

Originality/value

The paper extends previous research on earnings management in several ways. First, while earlier studies usually use accruals methods to measure earnings management, the authors use the real earnings management approach as managers can switch from accruals to real earnings management when facing more scrutiny from auditors and/or more constrained regulations or standards that may limit their capability to use discretionary accruals. Second, this study reports new findings, as the authors find partial evidence of a significant relationship between audit quality and real earnings management. Third, it is one of the few studies to use a real earnings management index to measure earnings management and its link to audit quality.

Details

International Journal of Managerial Finance, vol. 16 no. 2
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 22 October 2019

Chong Siew Huay, Jonathan Winterton, Yasmin Bani and Bolaji Tunde Matemilola

The purpose of this paper is to analyse the impact of remittances on human development in developing countries using panel data from 1980 to 2014 and to address the…

Abstract

Purpose

The purpose of this paper is to analyse the impact of remittances on human development in developing countries using panel data from 1980 to 2014 and to address the critical question of whether the increasing trend of remittances has any impact on human development in a broad range of developing countries.

Design/methodology/approach

Usual panel estimates, such as pooled OLS, fixed or random effects model, possess specification issues such as endogeneity, heterogeneity and measurement errors. In this paper, we, therefore, apply dynamic panel estimates – System generalised method of moment (Sys-GMM) developed by Arellano and Bond (1991) and Arellano and Bover (1995). This estimator is able to control for the endogeneity of all the explanatory variables, account for unobserved country-specific effects that cannot be done using country dummies due to the dynamic structure of the model (Azman-Saini et al., 2010).

Findings

The effect of remittances is statistically significant with positive coefficients in developing countries. The significant coefficient of remittances means that, holding other variables constant, a rise in remittance inflows is associated with improvements in human development. A 10 per cent increase in remittances will lead to an increase of approximately 0.016 per cent in human development. These findings are consistent with Üstubuci and Irdam (2012) and Adenutsi (2010), who found evidence that remittances are positively correlated with human development.

Practical implications

The paper considers implications for policymakers to justify the need for more effective approaches. Policymakers need to consider indicators of human development and to devise public policies that promote income, health and education, to enhance human development.

Originality/value

The question of whether remittances affect human development has rarely been subject to systematic empirical study. Extant research does not resolve the endogeneity problem, whereas the present study provides empirical evidence by utilising dynamic panel estimators such as Sys-GMM to tackle the specification issues of endogeneity, measurement errors and heterogeneity. The present study provides a benchmark for future research on the effect of remittances on human development.

Details

International Journal of Social Economics, vol. 46 no. 10
Type: Research Article
ISSN: 0306-8293

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Article
Publication date: 6 June 2016

A.N. Bany-Ariffin, Bolaji Tunde Matemilola, Liza Wahid and Siti Abdullah

This paper aims to evaluate the impact of international diversification, through the investment abroad activities of the Malaysian multinational corporations (MNCs), on…

Abstract

Purpose

This paper aims to evaluate the impact of international diversification, through the investment abroad activities of the Malaysian multinational corporations (MNCs), on their financial performance.

Design/methodology/approach

The paper applies the panel generalized method of moments (GMM) estimation technique that gives better results.

Findings

The empirical findings show that the move to invest abroad has brought a positive impact on Malaysian MNCs’ financial performance. However, in terms of a firm’s risk, the results contradict the general internationalization-risk hypothesis.

Research limitations/implications

The study focuses on the top 100 multinational firms; future researchers may extend the time period and use the entire sample of all the multinational firms.

Practical implications

Foreign investments offer rewarding returns due to cheaper labour and raw materials, competitive edge in terms of technological advancement and larger market opportunities.

Originality/value

The paper contributes to the literature using the panel GMM’s estimation that effectively control for reverse causality and serial correlation problem. The paper also contributes to the international diversification and performance relationship, in a fast-growing Malaysia.

Details

Review of International Business and Strategy, vol. 26 no. 2
Type: Research Article
ISSN: 2059-6014

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Article
Publication date: 27 April 2020

Affaf Asghar, Seemab Sajjad, Aamer Shahzad and Bolaji Tunde Matemilola

Corporate governance (CG) is an ongoing interesting topic getting the attention of market participant, business regulators and researchers in today’s business environment…

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1186

Abstract

Purpose

Corporate governance (CG) is an ongoing interesting topic getting the attention of market participant, business regulators and researchers in today’s business environment. The purpose of this study is to analyze the moderating role of earnings management on CG-value and CG-risk relationship in the emerging economy of Pakistan.

Design/methodology/approach

A panel data analysis is used in this study. A panel data of 71 non-financial listed companies of Pakistan for the 2008-2017 period is considered for this study. Secondary data is collected from the annual reports of non-financial firms listed on PSX. Seven econometric equations are developed to test the research hypothesis.

Findings

The results reveal that CG significantly enhances the firm value and performance measures. Moreover, CG mitigates the practices of earning management and eliminates the risk that develops opportunistic behavior among managers to commit frauds.

Practical implications

The results of this study suggest that the board of directors (BODs) should intensify their governance role and ensure that the executives perform their duties to maximize the wealth of the shareholders and not engage in any misrepresentation of accounts that may lower the company position and decrease the firm value. Moreover, the managers should be informed about their accountability and acknowledged that at the end of the year, they would be audited by an expert’s auditors for their responsibilities. Concerning regulatory bodies, regulatory authorities should ensure that there must be at least one independent member on the board. The better-governed system reduces both agency conflicts and enhances firm value.

Originality/value

A number of studies have already been undertaken by multiple investigators to build connection among CG with firm performance, but there is not even a single study in the literature that considers CG, firm value, firm Risk and discretionary earning management as a whole in one model to generalize its results in the emerging economy of Pakistan. A fundamental element of current analyzation process addresses that this is the very first graft of study conducted in Pakistan having combination of four variables together in one revision. There is minimal work that focuses on moderating effects of earning management on the CG-value and CG-risk relationships. This study uses two standard measures of firm performance (i.e. ROA and Tobin’s Q), one proxy of earning management (DEM) and three attributes of CG (board size, audit quality and ownership structure). Previously, researchers have not investigated a model that combines variables (CG as independent and Firm performance and Firm Risk as dependent along with DEM as moderator) in a single study.

Details

Corporate Governance: The International Journal of Business in Society, vol. 20 no. 4
Type: Research Article
ISSN: 1472-0701

Keywords

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