Role of earnings management in determining firm value: An emerging economy perspective

Abstract

Resource allocation decisions by investors are made on the basis of information provided by firm management. The reports providing information are prepared with the help of international financial reporting standards (IFRS) which provide a great deal of discretion to the management. Management, on the basis of this discretion, manipulates the financial information particularly earnings of firm termed as earnings management which has important implications for firm future. This earnings management can be accruals based and real activities based. This earnings management if beneficial for the firm is efficient and if detrimental is opportunistic. The current study investigates the behavior of earnings management for Pakistani non-financial listed firms for the period of 15 years for 2003-2017 and finds a positive relation between aspects of real and accrual earnings management and firm value variables. However, it appeared to be opportunistic for financially distressed firms and efficient for non-distressed firms when the sample was divided into four categories. Impact of accrual earnings management was more pronounced for Pakistani firms as compared to real earnings manipulation.