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Efficient contracting, earnings smoothing and managerial accounting discretion

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Purpose – The purpose of this paper is to examine whether the contracting incentives (i.e. bonus
plans, debt covenants, political costs hypotheses), and income smoothing can explain accounting
choices in an emerging country, Egypt.
Design/methodology/approach – The paper uses the ordinary least square regression model to
examine the relationship between earnings management and reporting objectives. A sample of 438
non-financial firms listed on the Egyptian Exchange over the period 2005-2007 is used.
Findings – The paper finds that the contracting objectives explain little of the variations in
accounting choices (i.e. discretionary accruals) in the Egyptian context. However, the paper finds that
mangers are likely to smooth the reported earnings by managing the accrual component in an attempt
to reduce the fluctuation in reported earnings by increasing (decreasing) earnings when earnings are
low (high) in attempt to reduce the variability of the reported earnings.
Research limitations/implications – The empirical results rely on the ability of earnings
management proxies to adequately capture earnings manipulation activities.
Practical implications – The findings of the study should be of substantial interest to regulators
and policy makers. The results implicitly contribute to the ongoing argument in relation to the optimal
flexibility permitted by standard setting and the argument that tightening the accounting standards
and mandating International Financial Reporting Standards are likely to improve reporting quality
and reduce opportunistic earnings management. The results reveal that many of the weaknesses
related to corporate reporting in emerging countries may result from the inadequate enforcement of
the law and the weak legal protection of minority shareholders. The results also highlight the crucial
role of understanding the reporting incentives, which is mainly shaped by institutional and market
forces and the legal environment, in explaining accounting choices.
Originality/value – Unlike previous studies that tested an individual objective, this study examines
the trade-offs among various reporting objectives in an emerging economy.

Keywords Discretionary accruals, Leverage, Earnings smoothing, Egyptian firms, Managerial compensation, Political costs

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Informasi Detail

Judul Seri

Journal of Applied Accounting Research

No. Panggil

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Penerbit

: Emerald Group., 2014

Deskripsi Fisik

Journal of Applied Accounting Research Vol. 15 No. 1, 2014 pp. 100-122

Bahasa

English

ISBN/ISSN

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Klasifikasi

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Tipe Isi

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Tipe Media

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Tipe Pembawa

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Edisi

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Subjek

AKUNTANSI

Info Detail Spesifik

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Pernyataan Tanggungjawab

Asmawati/Syahrial

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