Earnings management to meet or beat earnings thresholds: Evidence from the emerging capital market of Egypt

ISSN： 2040-0705

Source： African Journal of Economic and Management Studies, Vol.3, Iss.2, 2012-09, pp. : 240-257

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Abstract

Purpose - The purpose of this paper is to examine whether Egyptian listed firms engage in earnings management to meet or beat earnings thresholds, particularly, earnings level (avoiding losses) threshold and earnings change (avoiding earnings decreases) threshold. Design/methodology/approach - The paper uses the distribution of reported earnings approach, similar to Burgstahler and Dichev, to examine discontinuities around earnings thresholds as evidence on earnings management to meet or beat earnings thresholds. Findings - The research findings reveal that there is a discontinuity in the distribution of reported earnings and earnings changes of Egyptian listed firms surrounding zero. There are too few observations immediately below zero and too many observations immediately above zero. These results suggest that Egyptian listed firms tend to engage in earnings management to avoid reporting losses and avoid reporting earnings decreases. Research limitations/implications - The paper's main limitation is the relatively small sample size given the thinness of the Egyptian capital market, therefore, the findings should be interpreted with caution. Originality/value - The paper contributes to the literature by examining earnings management to meet or beat earnings thresholds in Egypt as one of the emerging markets.