Earnings management of acquiring and non-acquiring companies: the key role of ownership structure and national corporate governance in GCC

Abstract

We are mainly interested in the impact of acquisition, ownership structure, and national governance quality on accrual earnings management (AEM) in the GCC listed companies’ context. Our sample is composed of 3210 firm-year observations for the period from 2007 to 2017. We employ panel data models in investigating the determinants of AEM for acquiring and non-acquiring firms. The findings reveal that acquiring firms involve more in earnings management than non-acquiring firms and that acquiring firms involve in AEM through income increasing rather than income decreasing. Institutional and state ownership are found to be an efficient tool in restraining companies’ engagement in earnings management whereas foreign ownership is shown to have no impact. National governance quality is found to be an efficient mechanism to reduce the companies’ engagement in earnings management. The study has both organizational and policy implications. In the organizational context, the GCC listed companies could benefit from attracting institutional and state owners to mitigate earnings management and therefore enhance firm performance. In the legislative context, policy makers are encouraged to concentrate on developing national governance systems to mitigate AEM.