Does earnings quality instigate financial flexibility? New evidence from emerging economy

Abstract

Purpose: This research aims to examine the empirical relationship between earnings quality and financial flexibility, i.e., how information related to earnings affects firms' cash levels in the emerging economies. Design/Methodology/Approach: To attain the research objectives, we used panel data for 18 years (2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013)(2014)(2015)(2016)(2017) obtained from the CSMAR database. Statistical software STATA used for data analysis. Descriptive, multiple correlations, and unbalanced panel data analysis are used. Findings: Our empirical results negate the works conducted on the advanced economy showing that information related to earnings (Earnings Quality) is negatively associated with firms' Financial Flexibility irrespective of firms' characteristics, i.e., firms with profit or loss and firm's with R&D or without R&D expenditure. However, the firm's earnings quality, firm size, cash flows, financial constraints, dividends, and growth are the dominant predictor of financial flexibility. Moreover, the degree of dominance depends on the firm's specific characteristics. Research Limitations/Implications: This research has been conducted on the emerging Chinese market. For consistent and robust results, this research excluded the financial and other firms that possess different operational and regulatory attributes than the manufacturing firms. The study is useful for policymakers and managers to design their cash levels and avoid the hurdle of external finance or to accelerate their flexibility to raise money from an external source. Originality/Value: Previous research addressed the issue related to cost and benefit, information asymmetry, ownership concentration, and firm's propensity to cash holdings. A very little research conducted with earnings quality and cash holdings in the developed market (in Europe and the USA), and thus, for the first time, we address the issue of earnings quality and financial flexibility in the emerging economy.

Timely Loss Recognition Helps Nothing

“…For instance, listed companies in the high-technology industry are required to devote more resources to R&D activities-e.g., [82][83][84][85]. Compared to other companies, there is an increasing likelihood that these companies will encounter accounting losses and thus seek to manipulate those losses-e.g., [86][87][88][89]. Hence, an investigation regarding the effect of manipulating losses in different industries would certainly be valuable for future research.…”

Pengaruh Corporate Governance, Financial Flexibility terhadap Earnings Quality Perusahaan Sektor Bank Indonesia

“…Menurut Islam et al, (2020), perusahaan dengan kualitas laba yang lebih rendah akan menunjukkan fleksibilitas keuangan yang lebih rendah dengan memegang lebih sedikit likuiditas dikarenakan lemahnya pengawasan dari manajer yang memperburuk pengeluaran kas. Sebaliknya, perusahaan dengan kualitas laba yang lebih tinggi menunjukkan fleksibilitas keuangan yang lebih tinggi dengan memegang lebih banyak aset likuiditas dan menjadi fleksibel secara keuangan untuk menjalankan motif kehati-hatian, motif transaksi, motif keagenan, dan motif spekulatif dari teori preferensi likuiditas.…”

“…Literatur mengenai kualitas laba tidak terlalu luas dan hanya menyediakan sedikit bukti mengenai bagaimana fleksibilitas keuangan bila dikaitkan dengan kualitas laba. Penelitian sebelumnya (R. Islam et al, 2022; M. R. Islam et al, 2020) menunjukkan, bahwa kualitas laba yang rendah berpengaruh negatif signifikan terhadap fleksibilitas keuangan. Penelitian (Farinha et al, 2018;García Lara et al, 2009) menunjukkan kualitas laba yang rendah dan fleksibilitas keuangan berhubungan positif, yang mana mengindikasikan bahwa kualitas laba yang rendah mendorong asimetri informasi dan perusahaan memegang lebih kas.…”

Do selected board governance mechanisms strengthen the link between institutional and macroeconomic variables and the financial flexibility of corporations? Empirical evidence from an emerging economy

“…In terms of determinants, research indicates that CFF could be affected by a number of institutional and macroeconomic factors (Booth et al, 2001), including profitability (PRF) (Hooshyar et al, 2017), tangibility (TAN) (i.e. the collateral value of fixed assets) (Mahmood et al, 2019a), financial leverage (FLEV) (Byoun, 2007), insider corporate ownership and quality of earnings (Estwick, 2015;Islam et al, 2020), firm age (Jang, 2017), inflation (Hanousek and Shamshur, 2011;Sett and Sarkhel, 2010;Gajurel, 2006), the growth rate of GDP (Cho et al, 2014;Gajurel, 2006), equity market development (EMD) and banking sector development (BSD) and concentration (Mahmood et al, 2019a;Mahmood et al, 2019b). Extant studies indicate that these factors are significant determinants of the CFF of firms in both developing and emerging countries.…”