Academic journal article IUP Journal of Corporate Governance

The Determinants of Earnings Management in Developing Countries: A Study in the Tunisian Context

Academic journal article IUP Journal of Corporate Governance

The Determinants of Earnings Management in Developing Countries: A Study in the Tunisian Context

Article excerpt

(ProQuest: ... denotes formulae omitted.)


Manager intervention in accounting information is named in several ways, such as 'cosmetic accounting' or 'accounting manipulation'. The most frequently used term in the empirical literature is 'earnings management'. Schipper (1989) defines earnings management as a manager intervention in external financial reporting process to appropriate personal gain. This definition shows that earnings management phenomenon results in managers' opportunistic behavior. In fact, earnings management is a managerial practice that has been a result of researches in positive accounting theory and agency theory and has emerged in the context of information asymmetry between managers and other business partners. Otherwise, earnings management can be examined in the context of efficient market theory. In this perspective, managers are motivated to manipulate earnings in order to publish more informative disclosure (Watts and Zimmerman, 1986).

Nowadays, interest towards determinants of earnings management has accentuated with the increasing number of financial scandals that have reduced investors' trust in information published on capital market (Fernandez and Garcia, 2007). Indeed, the extent and causes of earnings management have important implications for regulators, analysts, academics and practitioners (Beneish, 1999; and Kothari et al., 2005). This allows assessing earnings quality, facilitates setting new standards and helps the SEC to enforce standards (Stubben, 2010).

The study of determinants of earnings management in the Tunisian context is interesting because Tunisia is a developing country with an emerging capital market whose structure is consistent with international standards. A majority of Tunisian firms are family owned or controlled. Moreover, bank debt is essential for the survival of Tunisian companies. Tunisia has undergone several reforms such as the GATT, the creation of a free trade zone with the European Union, the liberalization of interest rates and exchange rates, the launch of the Guide for Good Governance Practices of Tunisian Companies (2008)1 and the Guide for Annual Reports of Tunisian Companies (2009)2. Tunisia has also experienced several accounting reforms. This was an initiative in the program of international accounting harmonization. In fact, due to economic changes aimed at establishing a market economy, Tunisia was compelled to introduce a new accounting system that fulfills the needs of the more diversified financial statement users. Thus, Tunisian accounting system, which was inspired by the French plan, became a new accounting system with a conceptual framework inspired from IASC, promoting investors' interests.

This study aims to identify the factors influencing earnings management in emerging countries with the example of Tunisia. These factors are grouped into two categories-incentives and constraints to earnings management. Data of 19 Tunisian listed companies were collected from the Tunisian stock exchange for the period 2003-2009. Discretionary accruals was used to estimate the extent of earnings management. The study relies on Dechow et al. (1995) (modified Jones model), Kothari et al. (2005) and Raman and Shahrur (2008) models. Subsequently, the residuals of these models are regressed on a set of explanatory variables that are hypothesized to have impact on earnings management.

The rest of the paper is organized as follows: it presents the research hypotheses developed on the basis of literature review, and follows it up with a description of the empirical methodology. Subsequently, it presents the results, and finally, offers the conclusion.

Literature Review and Hypotheses Development

Incentives to Earnings Management

The politico-contractual theory (Watts and Zimmerman, 1986) provides several explanations to earnings management. The bonus-plan hypothesis supposes that managers apply accounting policies that enable them to satisfy their interests by shifting the results of future periods to the current period. …

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