Research Article
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Year 2021, , 67 - 82, 30.03.2021
https://doi.org/10.17261/Pressacademia.2021.1388

Abstract

References

  • Abdelkarim, N., & Zurich, K., (2020). Corporate Governance and Earnings Management: Evidence from Listed Firms at Palestine Exchange. Asian Economic and Financial Review, 10 (2), 200-217.
  • Alzoubi, E.S.S., (2018), "Audit quality, debt financing, and earnings management: Evidence from Jordan", Journal of International Accounting, Auditing and Taxation, 30 (3), 69-84
  • Alareeni, B., & Aljuaidi, O. (2014), "The modified jones and Yoon models in detecting earnings management in Palestine Exchange (PEX)", International Journal of Innovation and Applied Studies, 9 (4), 1472.
  • Alghamdi, S., & Ali, L. (2012) "The investigation into earnings management practices and the role of corporate governance and external audit in emerging markets: Empirical evidence from Saudi listed companies. Durham University.
  • Badertscher, B. A. (2011), "Overvaluation and the choice of alternative earnings management mechanisms", The Accounting Review, 86 (5), 1491-1518.
  • Beaver, W. H., & Demski, J. S. (1979), "The nature of income measurement" Accounting Review, 54 (1), 38-46.
  • Beneish, M. D. (2001), "Earnings management: A perspective". Managerial Finance, 27 (12), 3-17.
  • Bhuiyan, M. B., Roudaki, J., & Clark, M. B. (2013), "Corporate governance compliance and discretionary accruals: New Zealand evidence", Business and Finance Journal, 7 (2), 101-124.
  • Bao, S.R. & Lewellyn, K.B., 2017, "Ownership structure and earnings management in emerging markets—An institutionalized agency perspective", International Business Review, 26 (5) , 828-838.
  • Brooks, L. D., & Buckmaster, D. A. (1976), "Further evidence of the time series properties of accounting income", The Journal of Finance, 31 (5), 1359-1373.
  • Chamberlain, T. W., Butt, U. R., & Sarkar, S. (2014), "Accruals and real earnings management around debt covenant violations", International Advances in Economic Research, 20 (1), 119-120.
  • Cohen, D. A., & Zarowin, P. (2008), "Economic consequences of real and accrual-based earnings management activities", Leonard Ster School of Business& New York University, Working Paper.
  • Cohen, D. A., & Zarowin, P. (2010), "Accrual-based and real earnings management activities around seasoned equity offerings", Journal of accounting and economics, 50 (1), 2-19.
  • DeAngelo, L. E. (1986), "Accounting numbers as market valuation substitutes: A study of management buyouts of public stockholders", Accounting Review, 400-420, 61 (3), 400-420
  • Dechow, P. M. (1994), "Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals", Journal of accounting and economics, 8 (1), 3-42.
  • Dechow, P. M., & Dichev, I. D. (2002), "The quality of accruals and earnings: The role of accrual estimation errors", The Accounting Review, 77 (1),35-59.
  • Dechow, P. M., Hutton, A. P., Kim, J. H., & Sloan, R. G. (2012), "Detecting earnings management: A new approach", Journal of accounting research, 50 (2), 275-334.
  • Dechow, P. M., Richardson, S. A., & Tuna, I. (2003), "Why are earnings kinky? An examination of the earnings management explanation", Review of Accounting Studies, 8 (2-3), 355-384.
  • Dechow, P. M., & Skinner, D. J. (2000), "Earnings management: Reconciling the views of accounting academics, practitioners, and regulators", Accounting Horizons, 14 (2), 235-250.
  • Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995), "Detecting earnings management”, Accounting Review, 70 (2), 193-225.
  • Fairfield, P. M., & Yohn, T. L. (2001), "Using asset turnover and profit margin to forecast changes in profitability", Review of Accounting Studies, 6 (4), 371-385.
  • Freeman, R. N., & Tse, S. Y. (1992), "A nonlinear model of security price responses to unexpected earnings", Journal of accounting research, 30 (2), 185-209.
  • Healy, P. M. (1985), "The effect of bonus schemes on accounting decisions", Journal of accounting and economics, 7 (1-3), 85-107.
  • Hejazi, R., Adampira, S., Ziarani, M. B., & Nobakht, A. V. (2014), "A Diagnostic for Earnings Management by Using Changes in Asset Turnover and Profit Margin", International Review of Management and Business Research, 11 (11), 230-241.
  • Hessayri, M., & Saihi, M. (2015), "Monitoring earnings management in emerging markets: IFRS adoption and ownership structure", Journal of Economic and Administrative Sciences, 31 (2), 86-108.
  • Höglund, H. (2010), "Detecting Earnings Management Using Neural Networks", http://urn.fi/URN:ISBN:978-952-232-109-1
  • Holthausen, R. W., & Leftwich, R. W. (1983), "The economic consequences of accounting choice implications of costly contracting and monitoring", Journal of accounting and economics, (5),77-117.
  • Jaggi, B., & Sun, L. (2006), "Financial distress and earnings management: effectiveness of independent audit committees", Whitcomb Center for Research in Financial Services (WCRFS), 06-31.
  • Jansen, I. P., Ramnath, S., & Yohn, T. L. (2012), "A diagnostic for earnings management using changes in asset turnover and profit margin" Contemporary Accounting Research, 29 (1), 221-251.
  • Jones, J. J. (1991)," Earnings management during import relief investigations", Journal of accounting research, 29 (2), 193-228.
  • Kasznik, R. (1999), "On the association between voluntary disclosure and earnings management", Journal of accounting research, 37 1, 57-81.
  • Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005), "Performance matched discretionary accrual measures", Journal of accounting and economics, 39 (1), 163-197.
  • McNichols, M., & Wilson, G. P. (1988), "Evidence of earnings management from the provision for bad debts", Journal of accounting research, Vol. 26, pp. 1-31.
  • McNichols, M. F. (2001), "Research design issues in earnings management studies", Journal of accounting and public policy, 19 (4-5), 313-345.
  • Nelson, M. W., Elliott, J. A., & Tarpley, R. L. (2000), "Where do companies attempt earnings management, and when do auditors prevent it?",N AFA 2001 New Orleans Meetings, Available at SSRN: https://ssrn.com/abstract=248129 or http://dx.doi.org/10.2139/ssrn.248129
  • Niu, F. F. (2006), "Corporate governance and the quality of accounting earnings: a Canadian perspective”, International Journal of Managerial Finance, 2 (4), 302-327.
  • Penman, S. H. (2007), "Financial reporting quality: is fair value a plus or a minus?”, Accounting and Business Research, 37. (sup1),33-44.
  • Petroni, K. R. (1992), "Optimistic reporting in the property-casualty insurance industry", Journal of accounting and economics, 15 (4), 485-508.
  • Rani, P., Hussain, F. F., & Chand, P. V. (2013), "Managerial incentives for earnings management among listed firms: evidence from Fiji", Global Conference on Business and finance proceedings, 7 (1),184-187.
  • Watts, R. L., & Zimmerman, J. L. (1978), "Towards a positive theory of the determination of accounting standards”, Accounting Review, 53 (1), 112-134.
  • Yoon, S. S., Miller, G., & Jiraporn, P. (2006), "Earnings management vehicles for Korean firms", Journal of International Financial Management & Accounting, 17 (2),85-109

A DIAGNOSTIC FOR EARNINGS MANAGEMENT USING CHANGES IN ASSET TURNOVER AND PROFIT MARGIN: EVIDENCE FROM PALESTINE EXCHANGE

Year 2021, , 67 - 82, 30.03.2021
https://doi.org/10.17261/Pressacademia.2021.1388

Abstract

Purpose - This paper aims to evaluate whether the earnings management diagnostic using changes in asset turnover and profit margin as proposed by Jansen et al., (2012) is informative in identifying earnings management
Methodology - Two tests were employed: firstly, the association between the diagnostic and discretionary accruals using Kothari et al., (2005) model, was tested by using Pearson correlation and contingency tables. Secondly, by using future profitability reversals as an indicator of earnings management, the investigation of whether the diagnostic has incremental information in identifying earnings management as compared to Kothari et al., (2005) model was performed using multivariate regression analysis. Data was collected for the period from 2006 to 2017 and comprises a total of (3,108) firm-year observations from the Palestinian stock exchange.
Findings- The results indicate that the diagnostic proposed by Jansen et al., (2012) is a useful indicator for earnings management, as well as this diagnostic, provides higher information content in identifying earnings management than the discretionary accruals model i.e. Kothari et al., (2005) model.
Conclusion- This study contributes to the limited earnings management literature in emerging economies generally, and in the Palestinian context particularly. The results of the study benefit financial statement users to have diagnostics for earnings management that are informative.

References

  • Abdelkarim, N., & Zurich, K., (2020). Corporate Governance and Earnings Management: Evidence from Listed Firms at Palestine Exchange. Asian Economic and Financial Review, 10 (2), 200-217.
  • Alzoubi, E.S.S., (2018), "Audit quality, debt financing, and earnings management: Evidence from Jordan", Journal of International Accounting, Auditing and Taxation, 30 (3), 69-84
  • Alareeni, B., & Aljuaidi, O. (2014), "The modified jones and Yoon models in detecting earnings management in Palestine Exchange (PEX)", International Journal of Innovation and Applied Studies, 9 (4), 1472.
  • Alghamdi, S., & Ali, L. (2012) "The investigation into earnings management practices and the role of corporate governance and external audit in emerging markets: Empirical evidence from Saudi listed companies. Durham University.
  • Badertscher, B. A. (2011), "Overvaluation and the choice of alternative earnings management mechanisms", The Accounting Review, 86 (5), 1491-1518.
  • Beaver, W. H., & Demski, J. S. (1979), "The nature of income measurement" Accounting Review, 54 (1), 38-46.
  • Beneish, M. D. (2001), "Earnings management: A perspective". Managerial Finance, 27 (12), 3-17.
  • Bhuiyan, M. B., Roudaki, J., & Clark, M. B. (2013), "Corporate governance compliance and discretionary accruals: New Zealand evidence", Business and Finance Journal, 7 (2), 101-124.
  • Bao, S.R. & Lewellyn, K.B., 2017, "Ownership structure and earnings management in emerging markets—An institutionalized agency perspective", International Business Review, 26 (5) , 828-838.
  • Brooks, L. D., & Buckmaster, D. A. (1976), "Further evidence of the time series properties of accounting income", The Journal of Finance, 31 (5), 1359-1373.
  • Chamberlain, T. W., Butt, U. R., & Sarkar, S. (2014), "Accruals and real earnings management around debt covenant violations", International Advances in Economic Research, 20 (1), 119-120.
  • Cohen, D. A., & Zarowin, P. (2008), "Economic consequences of real and accrual-based earnings management activities", Leonard Ster School of Business& New York University, Working Paper.
  • Cohen, D. A., & Zarowin, P. (2010), "Accrual-based and real earnings management activities around seasoned equity offerings", Journal of accounting and economics, 50 (1), 2-19.
  • DeAngelo, L. E. (1986), "Accounting numbers as market valuation substitutes: A study of management buyouts of public stockholders", Accounting Review, 400-420, 61 (3), 400-420
  • Dechow, P. M. (1994), "Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals", Journal of accounting and economics, 8 (1), 3-42.
  • Dechow, P. M., & Dichev, I. D. (2002), "The quality of accruals and earnings: The role of accrual estimation errors", The Accounting Review, 77 (1),35-59.
  • Dechow, P. M., Hutton, A. P., Kim, J. H., & Sloan, R. G. (2012), "Detecting earnings management: A new approach", Journal of accounting research, 50 (2), 275-334.
  • Dechow, P. M., Richardson, S. A., & Tuna, I. (2003), "Why are earnings kinky? An examination of the earnings management explanation", Review of Accounting Studies, 8 (2-3), 355-384.
  • Dechow, P. M., & Skinner, D. J. (2000), "Earnings management: Reconciling the views of accounting academics, practitioners, and regulators", Accounting Horizons, 14 (2), 235-250.
  • Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995), "Detecting earnings management”, Accounting Review, 70 (2), 193-225.
  • Fairfield, P. M., & Yohn, T. L. (2001), "Using asset turnover and profit margin to forecast changes in profitability", Review of Accounting Studies, 6 (4), 371-385.
  • Freeman, R. N., & Tse, S. Y. (1992), "A nonlinear model of security price responses to unexpected earnings", Journal of accounting research, 30 (2), 185-209.
  • Healy, P. M. (1985), "The effect of bonus schemes on accounting decisions", Journal of accounting and economics, 7 (1-3), 85-107.
  • Hejazi, R., Adampira, S., Ziarani, M. B., & Nobakht, A. V. (2014), "A Diagnostic for Earnings Management by Using Changes in Asset Turnover and Profit Margin", International Review of Management and Business Research, 11 (11), 230-241.
  • Hessayri, M., & Saihi, M. (2015), "Monitoring earnings management in emerging markets: IFRS adoption and ownership structure", Journal of Economic and Administrative Sciences, 31 (2), 86-108.
  • Höglund, H. (2010), "Detecting Earnings Management Using Neural Networks", http://urn.fi/URN:ISBN:978-952-232-109-1
  • Holthausen, R. W., & Leftwich, R. W. (1983), "The economic consequences of accounting choice implications of costly contracting and monitoring", Journal of accounting and economics, (5),77-117.
  • Jaggi, B., & Sun, L. (2006), "Financial distress and earnings management: effectiveness of independent audit committees", Whitcomb Center for Research in Financial Services (WCRFS), 06-31.
  • Jansen, I. P., Ramnath, S., & Yohn, T. L. (2012), "A diagnostic for earnings management using changes in asset turnover and profit margin" Contemporary Accounting Research, 29 (1), 221-251.
  • Jones, J. J. (1991)," Earnings management during import relief investigations", Journal of accounting research, 29 (2), 193-228.
  • Kasznik, R. (1999), "On the association between voluntary disclosure and earnings management", Journal of accounting research, 37 1, 57-81.
  • Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005), "Performance matched discretionary accrual measures", Journal of accounting and economics, 39 (1), 163-197.
  • McNichols, M., & Wilson, G. P. (1988), "Evidence of earnings management from the provision for bad debts", Journal of accounting research, Vol. 26, pp. 1-31.
  • McNichols, M. F. (2001), "Research design issues in earnings management studies", Journal of accounting and public policy, 19 (4-5), 313-345.
  • Nelson, M. W., Elliott, J. A., & Tarpley, R. L. (2000), "Where do companies attempt earnings management, and when do auditors prevent it?",N AFA 2001 New Orleans Meetings, Available at SSRN: https://ssrn.com/abstract=248129 or http://dx.doi.org/10.2139/ssrn.248129
  • Niu, F. F. (2006), "Corporate governance and the quality of accounting earnings: a Canadian perspective”, International Journal of Managerial Finance, 2 (4), 302-327.
  • Penman, S. H. (2007), "Financial reporting quality: is fair value a plus or a minus?”, Accounting and Business Research, 37. (sup1),33-44.
  • Petroni, K. R. (1992), "Optimistic reporting in the property-casualty insurance industry", Journal of accounting and economics, 15 (4), 485-508.
  • Rani, P., Hussain, F. F., & Chand, P. V. (2013), "Managerial incentives for earnings management among listed firms: evidence from Fiji", Global Conference on Business and finance proceedings, 7 (1),184-187.
  • Watts, R. L., & Zimmerman, J. L. (1978), "Towards a positive theory of the determination of accounting standards”, Accounting Review, 53 (1), 112-134.
  • Yoon, S. S., Miller, G., & Jiraporn, P. (2006), "Earnings management vehicles for Korean firms", Journal of International Financial Management & Accounting, 17 (2),85-109
There are 41 citations in total.

Details

Primary Language English
Subjects Finance, Business Administration
Journal Section Articles
Authors

Israa Al-madhoun This is me 0000-0003-2973-7703

Hisham Kamel Madi This is me 0000-0001-9477-8013

Mohammed Marwan Alashi This is me 0000-0002-9492-3716

Publication Date March 30, 2021
Published in Issue Year 2021

Cite

APA Al-madhoun, I., Madi, H. K., & Alashi, M. M. (2021). A DIAGNOSTIC FOR EARNINGS MANAGEMENT USING CHANGES IN ASSET TURNOVER AND PROFIT MARGIN: EVIDENCE FROM PALESTINE EXCHANGE. Journal of Economics Finance and Accounting, 8(1), 67-82. https://doi.org/10.17261/Pressacademia.2021.1388

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