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

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.

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“…Both AEM and REM mean values decrease during the pandemic and the One sample T-test results confirm that both figures are significantly different from one another. The decreases in both proxies of EM indicate that firms participate in fewer earnings management activities during the pandemic period, which is consistent with earlier studies, such as Ali et al (2022) and Azizah (2021), who found that firms restrict their earnings manipulation during difficult times.…”

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“…The paper “ Earnings management and investor protection during the COVID-19 pandemic: evidence from G-12 countries ” by Ali et al (2022) aimed to determine the interrelations among the strength of investor protection institutions and earnings management (EM) during the COVID-19 pandemic. Their sample included 5,519 firms listed in the G-12 countries during 2015–2020.…”