New Perspective of Earnings Management: The Effect of Outsiders' Requirements on Managerial Choice of Earnings Management Mechanisms
Nargis K.B. Makhaiel

This paper aims at studying the relationship between the existence of a particular set of motivational parties in firms' context, and the executives' choice of certain earnings management (EM) mechanisms. Analysing 34 interviews with executives, financial analysts, external auditors and regulators, and the official documents help to find that the possible existence of a group of sophisticated outsiders in the Egyptian context, including: capital and credit markets, and the regulatory rules of Egyptian Stock Exchange constitutes influential EM motives; and that these parties appreciate and place more emphasis on the long-term operational results of the firms. The paper also finds that managers' intention to achieve compliance between the financial requirements of these motivating factors and the reported earnings necessitates using operational EM mechanisms, including: sales activities, overproduction, and advertising expenses which do not lead to outsiders' suspicion in a firm's performance and value. This paper contributes to literature by giving new perspective for EM by revealing that some of firm's interested parties care about long-term operational profits and cash flows instead of short-term profits; by highlighting the importance of identifying EM motives, and their unique requirements and expectations to accurately determine EM techniques; by building a theoretical framework for better understanding of the study; and by collecting first hand information through adopting interpretive approach.

Full Text: PDF     DOI: 10.15640/rcbr.v4n1a7