The Impact of Earnings Management Practices on the Market Value of
Industrial Companies Listed on the Amman Stock Exchange: Evidence
from Jordan
SARI SULAIMAN MALAHIM
Department of Financial and Banking Sciences, Amman University College for Financial and
Administrative Sciences, Al-Balqa Applied University, JORDAN
Orcid no: https://orcid.org/0000-0001-5142-141X
AIMAN MAHMOUD ABU HAMOUR
Accounting and Accounting Information System Department, Amman University College for
Financial and Administrative Sciences, Al-Balqa Applied University, JORDAN
Orcid no: https://orcid.org/0000-0002-7503-7225
WALEED KALF AL-ZOUBI
Department of Financial and Banking Sciences, Amman University College for Financial and
Administrative Sciences, Al-Balqa Applied University, JORDAN
Orcid no: https://orcid.org/0000-0002-5812-5573
EYAD ABDEL HALYM HYASAT
Department of Accounting, Faculty of business, Al-Balqa Applied University, JORDAN
MASHHOUR HATHLOUL MAHARMAH
Department of Financial and Banking Sciences, Amman University College for Financial and
Administrative Sciences, Al-Balqa Applied University, JORDAN
Orcid no: https://orcid.org/0000-0003-4479-0473
SHIREEN MAHMOUD ALALI
Department of Finance and Banking, Ajloun National University, JORDAN
Key-Words: - Earnings Management, Market Value, Industrial Companies, Amman Stock Exchange,
Financial markets.
Received: August 28, 2019. Revised: August 14, 2022. Accepted: September 5, 2022. Published: September 20, 2022.
1 Introduction
Reported Profit in financial reports is a critical point
in the business environment that represents the
performance and success of a company and its
ability to use its resources to earn returns. However,
in recent years, the failure of many companies has
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DOI: 10.37394/23207.2022.19.145
Sari Sulaiman Malahim, Aiman Mahmoud Abu Hamour,
Waleed Kalf Al-Zoubi, Eyad Abdel Halym Hyasat,
Mashhour Hathloul Maharmah, Shireen Mahmoud Alali
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Volume 19, 2022
Abstract: Reported earnings and their prediction is one of the most important factors that are relied upon in
determining the value of various investments, given that the higher the earnings, the greater the possibility of
distributing profits, and accordingly, stock prices are determined in the financial markets. This study aims to
examine the impact of earnings management on the firm value of Jordanian industrial companies listed on the
Amman Stock Exchange for 2015-2019. This study used discretionary accruals according to the modified Jones
model to measure earnings management. Tobin’s Q as well is used as a proxy to firm value. Furthermore, this
study used firm size, firm age, and leverage as control variables. In analyzing data, STATA is used. The results
showed that earnings management has a negative but insignificant impact on firm value. On the other hand,
leverage has a significant and negative effect on firm value. Firm age has a positive but insignificant effect on
firm value. Firm size has a negative and significant effect on firm value.
proven that reported earnings do not always help
stakeholders to anticipate future earnings. From
here, controversy emerged about the concept of
earnings management and its link to the market
value of companies [1].
Managers are free to choose among different
accounting methods and alternatives. They can
expedite or defer recognition of income and
expenses by adjusting inventory valuation methods,
changing depreciation methods, and estimating bad
debts [2]. Managers can exercise diligence in
preparing financial reports, which leads to reducing
the desired benefit of accounting standards as an
important indicator that helps disclose the
company's performance level. Perhaps the most
vulnerable criterion for miscalculation and
presentation by management is the profits that users
of financial statements rely on to make their
financial decisions. The net profit is the most
important individual item that is exposed to profit
management as it is a signal that helps guide the
allocation of resources, net profit also is an indicator
of the extent to which the company is engaged in
value-added activities in capital markets [3, 36].
Stock markets constitute a cornerstone of the
structure of the financial sector in any free
economy, and realize the importance of
accumulating the savings of individuals and
institutions through various forms of financial
instruments that issue a necessary and important
element for projects, which is money [4]. Although
international cooperation and its growing
importance seem to be vital to the value creation
process of all companies, it is not easy to recognize
and capture international cooperation in financial
statements. This results in a growing gap between
the financial value of companies as shown in
company reports and the stock market value [5].
Given the increasing challenges and problems
facing Jordanian public shareholding industrial
companies, it has become imperative for these
companies to seek ways to improve the efficiency of
working capital management by maximizing the
market value, as market value is a good measure to
indicate the efficiency of financial performance in
organizations in general and companies
Contribution in particular Profitability is an
important tool for measuring the efficiency of
management in its ability to use the company's
available resources [35]. Therefore, maximizing the
market value of the stock has become a central and
strategic goal for banks, business companies, and
financial managers that have given great support for
theories and studies in the field of financial
management in order to show the mechanism for
maximizing the market value of the stock and
maximizing the wealth of owners. Hence, the study
problem consisted in identifying the impact of profit
management on the Jordanian industrial public
shareholding companies’ Market value [35].
2 Literature Review
2.1 Earnings Management
Earnings management is one of the important
aspects of financial reporting and the main topic of
discussion among all the shareholders of the
company because the level of profit is one of the
important evaluation measures of performance.
Thus, any interference that violates the accuracy of
the reports can affect how users of financial reports
make their decisions. Profit management is a
consequence of agency theory, according to which
the interests of managers and owners conflict.
Information asymmetry between the manager and
the shareholders is the most important consequence
of the separation of ownership and management in
companies [6].
Earnings management is practicing that the
company's management may follow in order to
influence the profits included in the financial
statements, it is carried out to match the specific
objective and is different from the basic business
management of the company. Profit management
strategy uses accounting methods to provide an
overly positive view of the company's financial
positions, which inflate profits [7]. Earnings
management can be defined as approved methods
practiced by the management when preparing the
company’s financial reports, taking advantage of the
accounting flexibility and discretion granted to it to
affect the company’s profits, either by increasing or
decreasing. It can also be said that they express the
manipulation of financial numbers in a way that
affects the profit and its distribution, and the
methods of institutions differ in changing financial
reports with different objectives, and these methods
are acceptable when they are within flexibility in the
accepted accounting principles, and when they
move away from fraud and prove fictitious
operations [8, 4]. In this context, the standard of
profit quality was established in order to express the
financial position of the institutions as an indicator
of the dividends distribution and to enable
investment fleeing to be taken. Several indicators
can be adopted to evaluate the quality of profits,
which are: profit continuity, profits being free from
profit management practices, and matching revenues
with expenses [9].
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Mashhour Hathloul Maharmah, Shireen Mahmoud Alali
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[10] Murniati Argues that the collapse of global
companies was due to the imbalance of financing
structures, the inability to pay the outstanding
obligations, the weakness of corporate governance
systems in addition to the financial and
administrative corruption of audit firms. Therefore,
extensive researches highlight the impact of
corporate governance on earnings management [11-
13]. Indeed, corporate governance is a critical issue
to decrease or even eliminate earnings management
practices. In other words, governance mechanisms
aim to refute the opportunistic behaviour of
managers and preserve the behaviour of
shareholders and other stakeholders. On the other
hand, Almarayeh and Yasser focused on audit
quality as an important mechanism in reducing
earnings management practices [14-15].
2.2 Firm Value
The firm value is based on shares and their value
and is affected by a number of factors such as
supply and demand for shares and the circumstances
surrounding the organization, internal or external.
Therefore, market value is a good measure of the
efficiency of financial performance of organizations
in general and joint-stock companies in particular
[16-17, 35]. Al-Mahlawi defined the market value
as the value determined by the market for the stock
as the result of the interaction of the forces of
demand and supply, which is highly volatile and
changeable and is affected by several factors,
including future distributions and expectations of
the company’s growth, and the market value is the
currently listed price through which securities are
bought and sold In the market, or it is the value that
the stock market places on the entire company to
measure its estimates in light of its prospects and
circumstances [18].
The value of companies has received great attention
in many financial fields, as it is one of the most
important values that help measure the value of the
company in the open markets, as well as determine
the mental perception of the future prospects of the
company [19], as maximizing the value of assets
through maximizing the value of The company is
considered an important and basic matter for
increasing the wealth of the shareholders in the
company [20], and most of the company
management’s attention has become focused on
improving and increasing the company’s market
value, represented by stock prices in the financial
markets because this will lead to an increase in
market returns to shareholders and maintain Its
growth rates, and the impact on the expectations of
analysts and financial investors in the financial
markets about the company’s trends, profits and
future returns [21].
The market value is one of the most important
indicators of measuring the efficiency of the market
and the development of its activity. Many observers,
analysts, and financial investors depend on this
indicator. The rise in the stock market value index
indicates the efficiency and an increase in the
volume of transactions in the financial markets [22].
The market value of the shares reflects the status
and characteristics of the companies from the
volume of trading in them, and the rise in the market
value is a positive indicator of the company’s
success in the future, and it is considered to direct
the investors’ attitudes towards the shares of that
company due to their confidence in the strong
financial performance of the company [21].
Therefore, the main objective of the company is to
increase its value by taking measures and
identifying decisions that contribute to increasing its
value. As for poor decision-making by the
management, it leads to a decrease in profits and
then is reflected in the share price in the market.
Therefore, the importance of the market value is
manifested through any financial decision that
affects the company. And it is reflected in its value
[23]. The market value is of great importance to
companies, the greater the market value, the higher
the value of the company, and indicative of the
company’s success and superiority, which leads to
attracting investors to buy shares [18].
2.3 Earnings Management and Firm Value
The power of generating earnings is used to evaluate
the performance of a company. As a result, a
company will work hard to improve its performance
in order to make a large sum of money. Investors
are more interested in a company with a large
quantity of earnings than one with a low number of
earnings. The financial statement's earnings can
have an impact on a company's decision-making
[27]. Market analysts, on the other hand, utilize
these figures to evaluate a company's investment
potential and calculate its profitability [28]
However, when the market is unable to detect
opportunistic behaviour on the part of managers, as
the market assumes that the earnings numbers
reported by managers are the product of strong
performance. In the literature, mixed results
regarding the impact of earnings management on
firm value. [24]. Indrawan found that earnings
management practices have a positive effect on firm
value [29]. Sahrawi argues that when the market is
less sophisticated and does not assess information to
determine if it is valid or not in advance could be a
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Mashhour Hathloul Maharmah, Shireen Mahmoud Alali
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significant reason for the positive relationship
between earnings management and market valuation
[30].
However, Hartono argues that before responding to
information published by management, a market
will assess the information's authenticity. If the
market detects information about published earnings
obtained through earnings management, the market
will respond negatively by lowering the firm's value
[25]. For example, Darmawan found real earnings
management had a negative effect on firm value in a
study conducted in Indonesia. On the other hand,
they found that by using discretionary accruals to
measure accrual earnings management there is no
effect on the value of the firm [26].
In line with the literature, more earnings
management will be associated with lower business
valuations if investors experience information risk
coming from imprecise accounting earnings [32].
Therefore, this study expects that earnings
management has a negative effect on market
valuation. The researcher states the following
hypothesis:
H1: Earnings management has a significant
negative effect on the firm value of Jordanian
industrial companies listed on the Amman Stock
Exchange.
3 Methodology
3.1 Sample Selection
The study sample consists of all industrial
companies listed on the Amman Stock Exchange
(ASE) from 2015-2019. As a result, the number of
sample companies reached 34 companies. However,
companies that did not have data available over the
study period were excluded. Thus, the number of
companies that have data available for all years of
study reached 32 companies.
3.2 Study Variables
3.2.1 Dependent Variable
In this study, firm value is the dependent variable.
Tobin's Q is a wide proxy used in the literature to
measure firm value [32]. The following equation
represents the measure of Tobin's Q:
Where:
TQ: is the Tobin's Q
MC: is the market capitalization
D: is the book value of debt
TA: is the total assets
3.2.2 Independent Variable
Earnings management (EM) is the independent
variable. To define earnings management practices,
there is a common use of benefits management as an
agent; Either by discretionary accruals or the use of
total accruals [33] or in fact, the most widely used
discretionary model is the standard Jones model
(1991); It allows for the division of receivables into
non-discretionary and discretionary categories,
Islam proposed a modified Jones model for this, the
inaccuracy of measuring estimated accruals will be
reduced by emphasizing that sales are adjusted to
account for changes in accruals. Moreover, Dechow
found that MJM was more influential in discovering
earnings management practices than the standard
Jones model. Therefore, this study uses a modified
Jones model to measure earnings management.
The measurement of discretionary accruals
according to the modified Jones model is carried out
according to the following steps of Dechow.
Step 1: calculation the total accruals depending on
the following equation:
Step 2: calculating the non-discretionary accruals by
estimating the parameters of the model, through the
following regression equation for all sample
companies and each year separately:
TACit/ASit-1 = β1 (1/ASit-1) + β2 (∆REVit– ∆RECit)/
ASit-1 + β3 (FAit /ASit-1) +
it
Where:AS: total assets at the end of the previous
year. TAC: total accruals. ∆REC: change in
receivables. FA: fixed assets. ∆REV: change in
revenue. Step 3: calculating the non-discretionary
accruals for each of the sample companies by using
the model parameters estimated from the previous
equation:
NDA= β1 (1/ASit) + β2 (∆REVit– ∆RECit)/ ASit + β3
(FAit / ASit) +
it
Where: NDA: Non-discretionary accruals. To
measure the extent of creative accounting,
discretionary accruals will employ as a proxy. Non-
discretionary accruals are subtracted from total
accruals to get discretionary accruals. Step 4:
calculation discretionary accruals depending on the
following equation:
Discretionary accruals = Total accruals- Non-
discretionary accruals.
3.2.3 Control Variables
In line with the literature, this study uses firm size,
firm age, and leverage as control variables. Table 1
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shows the summarization of study variables and
their measurement.
Table 1. Summary of study variables
Description
Variable
name
Measurement
Dependent
Variable
Firm Value
Tobin's Q
Independent
Variable
Earnings
Management
The absolute value of
discretionary accruals
measured by Modified
Jones Model
Control
Variables
Firm Size
Log of company’s total
assets
Firm Age
The time length of a
firm establishment.
Leverage
Total debt divided by
total equity
3.3 Study Model
FV = α0 + β1EMit + β2SIZEit + β3AGEit + β4LEVit
+ ɛ
Where:
FV: is the firm value
EM: is the earnings management
SIZE: is the firm size
AGE: is the firm age
LEV: is the leverage
4 Analysis
4.1 Descriptive Statistics
Table 2 presents the descriptive statistics for the
study variables, including the dependent variable,
independent variable, and control variables. As
shown in table 2, the mean of Tonin's Q of the study
sample is 0.68 that indicate industrial sector in
Jordan is evaluated in less actual value. On the other
hand, the minimum value of Tobin's Q is .13 and the
maximum value of it is 2.26, this indicates a wide
variation in the valuation market to study sample.
Regarding to discretionary accruals, the company is
deemed engaged with earnings management if its
discretionary accruals of it are greater than zero. As
shown the table 2 the mean of discretionary accruals
is 0.23, which indicates there is an earnings
management practices in the Jordanian industrial
sector in general.
Table 2. Descriptive statistics of study variables.
4.2 Normality
One of the most crucial regression assumptions is
that the sample distribution is normal. Skewness and
Kurtosis test is conducted in this study to examine
the normality assumption. The table shows that all
study variables are not subject to a normal
distribution. Since the null hypothesis states that, the
data is subject to a normal distribution if the
probability is greater than 5%. As shown in table 3
all probability of study variables is less than 5%.
To reduce the problem of normality, this study used
the Ladder of powers test to find the best method to
be used in transformation variables to reach the
normal distribution. The result indicated that Tobin's
Q, Discretionary Accruals, age, and leverage have a
high probability when it is transformed into the
square root. Regarding the log of total assets, it has
a high probability when it transomed into 1/cubic.
Therefore, all variables have transformed according
to the results of the Ladder of powers test.
Table 3. Skewness and Kurtosis test
4.3 Multicollinearity
An important assumption in regression analysis is to
ascertain the problem of multicollinearity among the
Variable
Pr(Skewness)
Pr(Kurtosis)
Adj
chi2(2)
Prob>
chi2
Tonin's
Q
0.00
0.00
28.03
0.00
Discretio
nary
Accruals
0.00
0.12
20.50
0.00
Age
0.00
0.42
8.21
0.02
Leverage
0.00
0.11
9.67
0.01
Log
(Total
Assets)
0.00
0.01
13.99
0.00
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independent variables of the study. Anderson
defined a strong overall correlation coefficient
between any two independent variables as one that
exceeds 70%. In accordance with the existing
regression model, a detailed correlation matrix
containing all variables was undertaken to determine
the size of this problem. The matrix of correlation
coefficients is shown in table 34 there are no strong
correlations between the independent variables,
indicating the absence of a multicollinearity
problem in the study model.
Table 4. Correlation Matrix
1
2
3
4
5
Tobin's Q (1)
1
Discretionary
Accruals (2)
-0.2347
1
Leverage (3)
-0.4005
0.1166
1
Age (4)
0.2007
-0.099
-0.1557
1
Size (5)
0.0984
-0.0381
0.0628
0.2084
1
4.4 Results of model
This study uses a fixed effect model to examine the
impact of earnings management on firm value. As
shown in Table 5, the value of F was 7.64, and R
Square is .1977 which indicates the independent
variables of the study led to 19.77% changes in the
firm value of the study sample.
Table 5. Results of fixed model
TQ
Coef.
Std. Err.
t
P>t
DA
-0.2239424
0.19528
-1.15
0.254
LEV
-0.007518
0.002261
-3.33
0.001
AGE
0.0134199
0.010743
1.25
0.214
logTA
-1.233167
0.41836
-2.95
0.004
_cons
9.755255
3.178845
3.07
0.003
R-sq.: = 0.1977
Prob > F = 0.0000
F = 7.64
The results indicate that there is a negative but
insignificant effect of earnings management on firm
value (t= -1.15, p = 0.254). Therefore, H1 is
rejected. In terms of control variables, leverage has
significant and negative effect on firm value (t= -
3.33, p= 0.001). Age has positive but insignificant
effect on firm value (t = 1.25, p = 0.214). Size has
negative and significant effect on firm value (t = -
2.95, p = .004).
5 Discussion
This paper aimed to demonstrate the impact of
earnings management practices on the market value
of industrial companies listed on the Amman Stock
Exchange. Industrial companies play an important
and vital role with their various businesses in
developing the local economy in which they
operate. In recent years, interest in them has
increased dramatically and has become one of the
basic ingredients for building and developing the
Jordanian national economy. This study focused on
discretionary accruals as an indicator of earnings
management, as it depends largely on the
assessment and judgments of management. The
phenomenon of earnings management has become
one of the most important methods of managing
accounting data with the aim of positively affecting
the company's market value. The prevalent use of
accounting information by financial analysts and
investors to help evaluate stock prices can generate
a motive or incentive for managers to manipulate
profits, in an attempt to influence the stock price
performance in the short term. In general, investors
and analysts base the reported profits, and therefore
it is expected that earnings management practices
reduce the value of the company in the financial
market. In this study, a negative relationship was
found between earnings management and firm
value; however, this relationship is not statistically
significant.
6 Conclusion
The importance of this paper appears by focusing on
the concept of profit management efficiency in
Jordanian public shareholding industrial companies
and its impact on the market value; Because this has
an impact on the industrial sector at present, and to
benefit from the application of the results in
industrial companies to add scientific value and to
make recommendations based on these results, as it
is expected that the results that were included in the
study of companies will help. Therefore, we hope
that this study will be of great importance to
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researchers and financial analysts who are interested
in the efficiency of profit management.
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Waleed Kalf Al-Zoubi, Eyad Abdel Halym Hyasat,
Mashhour Hathloul Maharmah, Shireen Mahmoud Alali
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Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
-Sari Malahim; formal analysis,
-Aiman Abu Hamour; investigation,
-Waleed ALzoubi; Data curation,
-Eyad Hyasat; was responsible for the Statistics,
-Mashhour Maharmah; resources,
-Shireen AlAli; methodology.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/deed.en
_US
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2022.19.145
Sari Sulaiman Malahim, Aiman Mahmoud Abu Hamour,
Waleed Kalf Al-Zoubi, Eyad Abdel Halym Hyasat,
Mashhour Hathloul Maharmah, Shireen Mahmoud Alali
E-ISSN: 2224-2899
1620