The Tradeoff between Accruals and Real Activities Earnings Management by More Capable Managers: Evidence from Egypt

Abstract

The purpose of this study is to investigate the impact of managerial ability on the choice between accruals and real earnings management in the Egyptian setting. To achieve this purpose, data was collected from the annual financial statements of the companies included in the sample composed of 83 companies that belong to 7 main sectors: real Estate, basic Resources, building Materials, contracting and Construction Engineering, Food, Beverages, & Tobacco, travel & Leisure, and health Care & Pharmaceuticals. These companies are listed and traded in the Egyptian Stock Exchange EGX during the period 2018-2020. Two regression models were developed to test the research hypotheses, the first was about the impact of managerial ability on accruals earnings management, and second was about the impact of managerial ability on real earnings management. Feasible Generalized Least squares FGLS test was used to test the research hypotheses because the problems of heteroskedasticity and autocorrelation existed in the study data. Results showed that managerial ability has a significant positive impact on both accruals earnings management and real earnings management. The study findings have implications for standards setters, investors, analysts, auditors, and tax authorities in Egypt and other emerging economies.