Real earnings management versus accrual-based and its effect on firm performance : evidence from Egypt

Abstract EN

This paper empirically investigates whether Egyptian firms use real activities manipulation to substitute accrual-based earnings management, and what is the effect of real earnings management on operating performance for a sample of firms listed on the Egyptian Stock Exchange during the period from 2000 through 2014.

Results demonstrate that: First, Egyptian firms employ both accrual-based and real earnings management to achieve earnings targets.

The two mechanisms are used simultaneously, no complete substitutive relation between the two strategies.

Second, Egyptian managers do not alter their earnings management techniques to cope with corporate and political events.

This is evident in the passive response for the introduction of Egyptian Accounting Standards in 2007 and the Egyptian Revolution of 2011.

Third, real activities manipulation has an adverse effect on Egyptian firms' performance, where real earnings management metrics are negatively associated with firms' just meeting earnings benchmarks.