The Effect of Real-Profit Management Operations on the Market
Returns of Jordanian Industrial Enterprises' Shares
KHALED ERIEJ ABURISHEH1, LAITH AKRAM MUFLIH AL-QUDAH1,
ASHRAF MOHAMMAD SALEM ALRJOUB2, FARIS ALKARABSHEH1,
LEQAA NAIFE AL-OTHMAN2, HANI AL-AZAB1
1Department of Accounting and Accounting Information System,
Amman University College for Financial & Administrative Sciences,
Al-Balqa Applied University,
Amman, 11937
JORDAN
2Department of Administrative & Financial Sciences,
Huson University College,
Al-Balqa Applied University,
Irbid, 13937,
JORDAN
Abstract: - This research aims to examine the impact of actual earnings management activities on stock market
returns. The study utilizes data from 56 industrial corporations listed on the Amman Stock Exchange (AXE)
between 2011 and 2020. After removing entities with insufficient data, the sample size was reduced to 43
enterprises. The research findings indicate a significant positive relationship between actual earnings
management activities and the market returns of industrial enterprise shares. This study contributes to the
existing literature on earnings management by providing evidence on real activity manipulation, which has
received less attention so far. Real activity manipulation refers to management actions that deviate from typical
business operations to achieve specific profit targets. The significance of this research lies in its contribution to
understanding the role of actual earnings management activities in influencing market returns. The results have
implications for investors, regulators, and financial analysts, who can use this knowledge to make informed
investment decisions, monitor financial reporting practices, and identify potential earnings management
activities.
Key-Words: - profit management, market returns, Jordanian industrial enterprises.
Received: March 13, 2023. Revised: August 26, 2023. Accepted: September 25, 2023. Available online: November 11, 2023.
1 Introduction
Numerous studies have shown that effective
corporate governance systems have a positive
impact on the information environment and profit
quality. Such systems can limit managerial
opportunism and minority shareholder expropriation
by controlling stockholders, reducing information
asymmetry, and enhancing profit quality, [1]. In
today's highly competitive business environment,
enterprise owners strive to produce good financial
records to attract investors. One way to improve
financial statements is through earnings
management, [2]. However, [3], has raised concerns
about enterprise governance due to a misalignment
of interests and incentives between dominant
founders and incumbent shareholders. This raises
questions about the effectiveness of corporate
governance in preventing opportunistic behavior by
enterprise owners.
Earnings management can be categorized into
two types: incremental manipulations and outright
manipulations, [4]. Among them, actual activity
manipulations, also known as real earnings
management, are more commonly used than accrual
manipulations. Accrual manipulations are usually
the focus of scrutiny by auditors and regulators due
to their higher risk. Real earnings management is
difficult to identify as it is indistinguishable from
legitimate business decisions, and the expenses
involved are often higher than those of accrual
earnings management, [5]. Abnormal production
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Khaled Eriej Aburisheh, Laith Akram Muflih Al-Qudah,
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Faris Alkarabsheh, Leqaa Naife Al-Othman, Hani Al-Azab
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costs, abnormal cost of sales, and abnormal cash
flow can be used to identify true manipulations, [6].
Numerous studies have established a strong
relationship between directors and company profits.
One strategy that directors use to influence earnings
is manipulating accruals without any direct cash
flow consequences, commonly known as "accrual
manipulation." Examples of accrual manipulation
include deferring asset write-offs and under-
provisioning for credit loss costs. Directors are also
encouraged to maintain control over real-world
activities throughout the year to achieve specific
profit targets. Manipulating real operations can
impact cash flows and, in some instances, accruals.
Although much research has focused on identifying
abnormal accruals, studies that evaluate profit
management through real actions have primarily
concentrated on investment activities, such as
reductions in R & D spending, [7], [8].
The study presented here examines the effects
of corporate governance on profit management as
well as the effectiveness of governance systems in
avoiding opportunistic behavior. It underlines the
significance of good company governance in
enhancing the information environment and profit
quality by preventing management opportunism and
minority shareholder expropriation. Earnings
management is explored, with an emphasis on real
earnings management, which comprises actual
activity manipulations, which involve manipulating
financial statements to meet financial goals. The
described work seeks to add to the current literature
by presenting empirical approaches for detecting
genuine activity manipulation using cash flow from
operations indicators. However, a detailed
examination and comparison of many studies and
models relating to the subject is absent. Further
study into research articles is required to acquire a
better knowledge of profit management and
corporate governance, including alternate detection
methods and the effectiveness of various
governance structures in reducing opportunistic
conduct.
This study contributes to the literature on
earnings management by examining the
manipulation of real-world operational activities,
which has received limited attention in prior
research. Real activity manipulation refers to
management actions that deviate from normal
business operations to meet specific profit targets.
The primary objective of this research is to develop
empirical methods for identifying real activity
manipulation. The study examines cash flow from
operations indicators, including production costs,
cost of goods sold, and operational cash flow, which
better represents the impact of real operations than
accruals. Using these measures, the study detects
real-world activity manipulation at the zero-earnings
threshold. The findings reveal that firms attempt to
avoid losses by offering temporary price discounts
to increase sales, engaging in excess production to
reduce the cost of goods sold, aggressively cutting
discretionary expenses to improve margins, and
striving to achieve higher market returns. Therefore,
the study's primary aim is to develop empirical
methods for detecting real-world activity
manipulation.
The impact of an abnormal value on production
costs, sales costs, and cash flow operational
activities is closely linked to the market returns of
the firm. Cash flow from operational activities
reflects how well the firm's market returns have
performed. As it is derived from routine activities
carried out by the firm, it can be used to measure
market returns. According to, [9], real earnings
management that is used to achieve profit targets
has a significant and positive impact on stock
returns, whereas real earnings management does not
affect the path of stock returns. Moreover, [10],
found that firms engage in real profit management
activities by offering discounts to boost sales,
engaging in additional production to reduce COGS,
and limiting discretionary expenses to improve
profits. The study, [11], further suggests that the
relationship between real earnings management and
cash flows is weak. Additionally, real profit
management activities have a significant economic
impact on changes in the split share structure of
firms.
The major goal of this research is to look at the
influence of actual profit management efforts on
stock market performance. We are particularly
interested in the consequences of such operations on
the stock prices of industrial businesses listed on the
Amman Stock Exchange. Real earnings
management refers to corporations' purposeful
activities to manipulate reported earnings through
operational choices to influence investor perceptions
and market outcomes. This study intends to
contribute to the current literature on earnings
management and its implications for financial
markets by investigating the link between actual
earnings management and stock market
performance. Offering insights into the
trustworthiness of financial statements and the
possible hazards linked with such activities.
Furthermore, by investigating the influence of actual
earnings management in the Jordanian stock market,
this study attempts to give useful insights into the
specific circumstances of that market. We hope that
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Khaled Eriej Aburisheh, Laith Akram Muflih Al-Qudah,
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Faris Alkarabsheh, Leqaa Naife Al-Othman, Hani Al-Azab
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by doing this research, we will be able to shed light
on the dynamics of earnings management methods
in a rising country, as well as add to our knowledge
of market efficiency and investor behavior in this
setting. Finally, the outcomes of this study are
intended to improve our understanding of the link
between actual earnings management and stock
market performance, providing significant insights
for Jordanians and others.
The structure of this document is divided into
several sections. Section 2 provides the theoretical
foundation for the relationship between variables.
The inquiry model is presented in Section 3. The
research design is explained in Section 4. In Section
5, data is analyzed using a descriptive-analytical
technique to validate hypotheses and draw
conclusions. Section 6 presents the study's findings,
discusses potential theoretical and practical
implications, and acknowledges any limitations of
the study.
2 Theoretical and Development of
Hypotheses
Based on prior research on alternative earnings
management techniques, it is expected that
managers will resort to actual earnings management
actions as a substitute to achieve their profit targets,
[6]. However, recent studies have also investigated
the inequalities in costs and time required for
manipulating earnings management and their
implications for managers' trade-off decisions. Both
real-world activities and earnings management incur
costs, and corporations face varying degrees of
constraint for each method, affecting their ability to
utilize those, [12]. Consequently, managers' trade-
off decisions are influenced by the relative costs of
the earnings management technique, which are
determined by the firm's operational and accounting
environment. In other words, given a certain amount
of money, if a manager has limited discretion over
one earnings management tool, he or she will resort
to using the other more frequently, [13].
2.1 Manipulation of Production Costs against
Market Returns on Jordanian Industrial
Corporation Shares
From, [14], perspective, overproduction is a strategy
adopted by firms to increase profits by producing
more than the expected demand. The excess
production helps to distribute fixed overhead
expenses across a higher number of units, reducing
fixed costs per unit. This reduction is not offset by a
proportional increase in marginal costs, resulting in
lower total unit prices. Although overproduction
incurs retained charges that cannot be recovered
during the sales period, the lower cost of goods sold
increases the firm's profit. However, this concept
applies only to manufacturing corporations and not
to non-manufacturing ones. To calculate production
costs, researchers use the total cost of goods sold
and inventory changes throughout the period, as
opposed to examining manufacturing expenses. This
approach has two advantages: first, manufacturing
costs reflect real actions and are less susceptible to
accrual manipulation. Second, the LIFO/FIFO cost
flow assumption only affects the reported cost of
goods sold and not production costs. Researchers
use the, [15], model to calculate the normal levels of
CFO, discretionary expenditure, and production
costs for each firm per year. Departures from these
norms are labeled as abnormal CFO, abnormal
production costs, and abnormal discretionary
expenditure. Researchers study three modification
methods and their impact on these variables. Based
on this literature review, it can be hypothesized that
overproduction can increase profits for
manufacturing firms, but it incurs retained charges
and reduces the cash flow generated by operational
activities.
H1: Real earnings management (ROA, ROE, and
EPS) by production cost manipulation influences the
market returns of Jordanian industrial enterprises'
shares.
2.2 Manipulation of Cost of Goods Sold
against Market Returns on Jordanian
Industrial Corporation Shares
The study, [16], suggests that one strategy for
engaging in income management activities is
discretionary cost reduction, in which firms
unilaterally reduce discretionary expenses to
increase earnings and meet defined goals. The
study, [17], found that US firms that fulfill analysts'
cash flow forecasts are more likely to engage in
income management activities such as discretionary
spending, production, and sales to increase
profitability. However, [18], shows that such firms
have poor subsequent operating performance and
stock market performance over the next three years.
The study, [19], found that firms that engage in
income management through discretionary spending
have poorer subsequent profitability and cash flows
from operations than non-income management firms
that meet or beat earnings targets. These studies
suggest that income management destroys value,
which is consistent with investor attitudes.
According to, [20], analysts believe that meeting
earnings benchmarks and smoothing earnings
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improves investor perceptions of firm performance.
Therefore, income management actions to meet
earnings benchmarks, excluding share repurchases,
have the potential to affect firm valuation. Based on
this literature review, the hypothesis can be stated as
follows: while discretionary cost reduction can
increase short-term earnings, it can lead to poor
subsequent operating and stock market performance,
ultimately destroying firm value.
H2: Real earnings management (ROA, ROE, EPS)
by the cost of goods sold manipulation influences
the market returns of Jordanian industrial
enterprises' shares.
2.3 Manipulation of Cash Flows Operating
against Market Returns on Jordanian
Industrial Corporation Shares
Cash flows from operating activities are critical to
an enterprise's financial health and stability because
they provide the monies needed to satisfy short-term
obligations and support continuous operations.
These cash flows reflect the fundamental business
performance by representing the real amount of cash
created and utilized by a company's day-to-day
operational activities. Certain businesses, however,
may resort to financial statement manipulation as a
short-term approach to fulfill certain goals or aims.
This manipulation entails sales managers making
efforts to fraudulently boost current-year sales,
exceeding abnormal targets to obtain targeted
profits. This may be accomplished through a variety
of strategies, as reported in studies, [21], [22], [23],
such as giving price reductions and extending credit
terms to speed the acquisition of more sales.
Although these strategies may result in increased
sales volume and profits in the current year, they
might have a negative impact on cash flows from
operational operations. Lower cash inflows may
arise as a result of lower cash receipts from the sale
of credits and greater refund liabilities. As a result,
cash flows from operational operations may be
lower than those generally connected with regular
sales.
The hypothesis proposed in this study shows
that sales managers' manipulation of financial
statements through methods such as price reduction
and greater credit leads to a drop in cash flows from
operational activities when compared to expected or
normal levels of cash flows. It emphasizes the
detrimental impact of such deceptive methods on
the cash flow stability of a firm, which is critical for
sustaining financial sustainability and supporting
continued operations. Enterprises should promote
openness in their financial reporting processes and
abstain from participating in manipulative behaviors
to maintain long-term viability and establish
confidence with stakeholders. Companies may
protect the integrity of their cash flows and lay a
firm basis for long-term development and success
by delivering accurate and trustworthy financial
information.
H3: Real earnings management (ROA, ROE, EPS)
by Operational cash flow influences the market
returns of Jordanian industrial enterprises' shares.
The current study will look at the influence of
genuine profit management actions on the market
returns of Jordanian industrial businesses' shares. To
do this, the research looks at three aspects of real
profit management: manufacturing cost
manipulation, cost of goods sold manipulation, and
operational cash flow manipulation. The study's
hypotheses are based on current literature, yet some
characteristics set this study apart from previous
studies. To begin, whereas previous research has
focused on earnings management approaches in
general, this study focuses on the influence of
genuine earnings management activities on market
returns. Actual operational actions that depart from
typical company operations to reach specified profit
objectives are included in real earnings
management.
The study gives insights into the practical
activities done by corporations to control their
profits by concentrating on real earnings
management, which may have different
consequences for market returns than other kinds of
earnings management.
Second, the research focuses on Jordanian
industrial firms, which may have distinct traits and
dynamics when compared to businesses in other
nations or industries. The study can give context-
specific insights into the association between actual
profit management actions and market returns in
Jordan by reducing its scope to this unique setting.
Furthermore, the research considers several aspects
of real earnings management, including return on
assets (ROA), return on equity (ROE), and earnings
per share (EPS). The paper provides a detailed
examination of the influence of real earnings
management on market returns by taking these
many characteristics into account. The study also
covers control factors such as organization size and
growth, which might impact the link between actual
earnings management and market returns.
Controlling for these issues allows for a more
precise understanding of the link between actual
earnings management and market returns. In
conclusion, the current study adds to the existing
body of knowledge by concentrating on the
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influence of actual profit management actions on
market returns in the context of Jordanian industrial
businesses. The study provides new insights into the
link between real earnings management and market
returns by studying various characteristics of real
earnings management and including control
variables, contributing to a deeper knowledge of the
problem in the Jordanian context.
3 Research Method
The study community consists of industrial
businesses listed on the Amman Stock Exchange
(ASE) between 2011 and 2020, according to the
research approach. This study community's selection
allowed for a concentrated inquiry into the link
between corporate governance and earnings
management in the context of the industrial sector.
To carry out the research, hypotheses were
developed based on relevant literature, describing
the predicted correlations between corporate
governance elements and earnings management
techniques. The variables required to test these
hypotheses were sourced from the existing body of
literature, ensuring that the study's structure was
founded on earlier research and established notions.
The implementation of proper statistical techniques
to evaluate the established hypotheses and fulfill the
study's objectives was a critical element of the
research. The researchers in this case used
appropriate statistical tools to investigate the links
between corporate governance structures and
earnings management strategies.
All 56 industrial businesses listed on the
Amman Stock Exchange (ASE) that produced
financial accounts by the end of 2020 comprised the
study community. However, several entities were
eliminated from the research sample throughout the
data processing phase. Due to a lack of data, ten
businesses were eliminated, which may have
hampered the researchers' ability to correctly
analyze their corporate governance methods and
profit management habits. Furthermore, three
businesses were removed from the sample owing to
the existence of anomalous data values, which might
have skewed the results or jeopardized the analysis's
validity. The researchers aimed to shed light on the
relationship between corporate governance and
earnings management in the industrial sector by
conducting this research within the selected study
community and using rigorous data analysis
techniques, providing valuable insights into the
factors influencing financial reporting practices in
this context.
The panel data approach was used by the
researchers to investigate the impact of real profit
management actions on the market returns of shares
in Jordanian industrial businesses. A hybrid
regression model, especially the fixed impact model
and the random impact model was used in the
investigation. The researchers hoped to use these
models to thoroughly examine the link between
genuine profit management operations and market
returns. The study concentrated on three main profit
management dimensions: return on assets, return on
equity, and earnings per share. These variables were
deemed dependent variables in the study since they
functioned as major indicators of financial
performance. The study also included control
variables such as firm size and growth, which
helped adjust for other factors that may impact
market returns.
The study aims to make a significant
contribution to the current literature by offering
unique insights into the influence of actual profit
management operations on Jordanian industrial
businesses' market returns. The research aims to
increase knowledge for policymakers, investors, and
corporate management by evaluating these linkages,
allowing them to make educated decisions to
improve financial performance and transparency
inside Jordanian firms. Overall, this research aimed
to provide valuable insights into the dynamics
between real profit management activities and
market returns, with particular relevance to Jordan's
industrial sector, through the use of panel data
analysis and the consideration of multiple
dimensions of profit management.
The use of real profit management activities was
tested on the market returns of shares in Jordanian
industrial corporations. This model is represented by
the following equation:
ROAit = β0 + β1 PCOSTit + β2 SCOSTit + β3
CFOit + β4 SIZEit + β5 GWTHit + εit
ROEit = β0 + β1 PCOSTit + β2 SCOSTit + β3
CFOit + β4 SIZEit + β5 GWTHit + εit
EPSit = β0 + β1 PCOSTit + β2 SCOSTit + β3
CFOit + β4 SIZEit + β5 GWTHit + εit
The model equation for the Study Variables is
presented in Table 1.
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Table 1. The model equation for the Study Variables
Acronyms
Variable
Name
Measurement Method
ROAit
Return on
assets
Net income / total assets
ROEit
Return on
equity
Net income / total
shareholders' equity
EPSit
Earnings per
share
(Net income – preferred
stocks) / average
outstanding shares
β0
PCOSTit
Production
cost
Total cost incurred by a
business to produce a
specific quantity of a
product or offer a service
SCOSTit
Cost of
goods sold
Total amount paid by a
business directly related to
the sale of products
CFOit
Operational
cash flow
Total amount of cash
generated by the regular
operating activities of a
business within a specific
time period
SIZEit
Corporation
size
Total assets
GWTHit
Corporation
growth
Total revenues by the total
revenues in an industry
over a period of time
εit
4 Data Analysis and Research
Findings
The study's independent variable is actual earnings
management, which is measured by the variables
ROA, ROE, and EPS. Meanwhile, the dependent
variables are abnormal levels of production cost,
cost of goods sold, and operational cash flow.
Descriptive statistics are utilized to provide
information on the variables used in the study,
including the mean, minimum, maximum, and
standard deviation for each proxy variable. The
descriptive data for this study are presented in Table
2. Table 2 provides descriptive statistics for the
variables used in the study. The mean corporation
size is 3.8850 with a standard deviation of 0.18344,
indicating a range between 3.45 and 4.11. The mean
cost of goods sold is 1.6290 with a standard
deviation of 0.20393, and the range is between 1.18
and 1.92. The mean production cost is 0.4680 with a
standard deviation of 0.042664, and the range is
between 0.39 and 0.54. The mean operational cash
flow is 0.3050 with a standard deviation of 0.12466,
and the range is between 0.12 and 0.57. The mean
earnings per share is 0.1940 with a standard
deviation of 0.12817, and the range is between 0.03
and 0.49. The mean ROA is 5.3610 with a standard
deviation of 4.00571, and the range is between 0.85
and 14.60. The mean ROE is 7.4960 with a standard
deviation of 5.34831, and the range is between 1.15
and 20.14. The mean corporation growth
opportunities ratios are 1.1 with a standard deviation
of 0.31623, and the range is between 0.2 and 1.2.
Table 2. The Analysis of Descriptive Statistics for
the Study Variables
Descriptive Statistics
N
Min.
Max.
Mean
Std.
Deviation
Corporatio
n Size
10
3.45
4.11
3.8850
.18344
Cost of
Goods
Sold
10
1.18
1.92
1.6290
.20393
Production
cost
10
.39
.54
.4680
.04264
Operationa
l Cash
Flow
10
.12
.57
.3050
.12466
Earnings
Per Share
10
.03
.49
.1940
.12817
Return on
Assets
10
.85
14.60
5.3610
4.00571
Return on
Equity
10
1.15
20.14
7.4960
5.34831
Corporatio
n Growth
10
.20
1.20
1.1000
.31623
Valid N
(listwise)
10
Table 3. Multicollinearity Assessments Using
Tolerance and VIF for Return on Assets as a
Dependent Variable
Coefficientsa
Model
Collinearity Statistics
Tolerance
VIF
1
(Constant)
Corporation Size
.191
5.243
Cost of Goods Sold
.381
2.623
Production cost
.262
3.813
Operational Cash Flow
.194
5.156
Earnings Per Share
.192
5.211
Corporation Growth
.223
4.489
The Dependent Variable is Return on Assets
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Table 3 displays the variance inflation factor
(VIF) which is used to detect multicollinearity in
multiple regression variables. The VIF values for
the variables range from 2.623 to 5.243, while the
tolerance values range from 0.191 to 0.381. These
values are commonly used to identify
multicollinearity in a regression analysis. If the
variance proportions due to the independent
variables are less than 10%, it indicates a high level
of multicollinearity among the predictor variables.
Table 4. Multicollinearity Assessments Using
Tolerance and VIF for Return on Equity as a
Dependent Variable
Coefficientsa
Model
Collinearity Statistics
Tolerance
VIF
1
(Constant)
Corporation Size
.191
5.243
Cost of Goods Sold
.381
2.623
Production cost
.262
3.813
Operational Cash Flow
.194
5.156
Earnings Per Share
.192
5.211
Corporation Growth
.223
4.489
The Dependent Variable is the Return on Equity
Table 4 presents the VIF values for ROE, which
range from 2.623 to 5.243, while the tolerance
values range from 0.191 to 0.381. The use of both
tolerance and VIF values in this study is to detect
multicollinearity, which is a common issue in
multiple regression analysis. If the variance inflation
factor (VIF) values exceed 10%, it indicates high
levels of multicollinearity among predictor
variables.
Table 5. The Values of Pearson Chi-Square Tests
Table 5 reports the results of the chi-squared
test, which is a valid statistical test for testing the
null hypothesis when the test statistic follows a chi-
squared distribution. The test indicates the absence
of heteroscedasticity in the residual data, as
evidenced by the minimum value of Chi2 (0.231)
with a significant level of 0.999, indicating that
there is no statistically significant heteroscedasticity
at the 0.05 level.
Table 6 (Appendix) presents the Pearson
correlation coefficients, which indicate the direction
and strength of the correlation between the
independent variables, the dependent variables, and
the control variables. The results show a positive
correlation between ROE and ROA and the
independent variables Corporation Size, cost of
goods sold, operational cash flow, and earnings per
share. Conversely, there is a negative correlation
between ROE and ROA and the independent
variables of production cost and Corporation
Growth.
Table 7 (Appendix) presents the results of the
multiple regression analysis, indicating that there is
an insignificant relationship between Corporation
Size, cost of goods sold, production cost,
Operational Cash Flow, and Corporation Growth
toward ROA. However, it is found that earnings per
share significantly affected ROA at the P. Value of
(0.010). The value of (R2) is (0.985), meaning that
the independent variables have explained 98% of
the variance in the (ROA). The value of (F) reached
(51.642), indicating that the model is significant.
Table 8 (Appendix) indicates that there is no
significant relationship between Corporation Size,
cost of goods sold, production cost, Operational
Cash Flow, and Corporation Growth towards ROE.
However, earnings per share was found to have a
significant impact on ROE at a P-value of (0.002).
The value of (R2) is (0.998), indicating that the
independent variables explain (99%) of the variance
in ROE. Moreover, the value of (F) reached
(106.952), which is statistically significant.
Table 9 (Appendix) indicates an insignificant
relationship between Corporation Size, cost of
goods sold, production cost, Operational Cash Flow,
Corporation Growth, and ROA towards EPS.
However, it was observed that ROE had a
significant impact on EPS at a P value of (0.018).
The R2 value was found to be (0.999), indicating
that the independent variables explained 99% of the
variance in the EPS. The F-value was (543.288).
5 Discussion
The purpose of this study was to examine the impact
of real earnings management on the market returns
of shares in Jordanian industrial corporations.
Specifically, the study investigated the effects of
real earnings management through manipulation of
production costs, cost of goods sold, and cash flows
Chi-Square Tests
Chi (2)
Sig.
Corporation Size
.231
.999
Cost of Goods Sold
.242
.997
Production cost
.242
.997
Operational Cash Flow
.231
.999
Earnings Per Share
.242
.997
Corporation Growth
.350
.869
DVs: ROA and ROE
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DOI: 10.37394/23207.2024.21.12
Khaled Eriej Aburisheh, Laith Akram Muflih Al-Qudah,
Ashraf Mohammad Salem Alrjoub,
Faris Alkarabsheh, Leqaa Naife Al-Othman, Hani Al-Azab
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from operating activities on market returns. The
study found that real earnings management through
production cost manipulation had a significant
positive impact on the market return of shares in
industrial enterprises. When enterprises produce
above their typical level, abnormal production costs
occur, resulting in cheaper fixed costs per unit of
production. This, in turn, leads to a lower reported
cost of goods sold and a larger operating margin,
resulting in a more favorable market return, [24].
Similarly, the study found that real earnings
management through cost of goods sold
manipulation had a substantial positive impact on
the market return of shares. Corporations' conscious
activities of implementing a cost of goods sold
result in lower cash outflows and debt incurred,
which positively affects the market return of shares
of industrial enterprises, [25]. Finally, the study
found that real earnings management through cash
flow manipulation had a significant positive impact
on the market return of shares. Anomalous
operational cash flow resulting from abnormal
activities leads to reduced value, which results in
higher-than-expected profits, [24]. These findings
are consistent with previous studies that have found
that actual abnormal activities strive to achieve
profit objectives that would deliver a superior
market return for shares in industrial enterprises,
[26], [27].
The results of this study indicate that irregular
production costs have a significant positive impact
on the market return of industrial enterprises' shares.
It suggests that corporations engage in earnings
management by manipulating production costs to
achieve higher market returns. Similarly, irregular
cost of goods sold values have a negligible but
positive influence on the market return of industrial
enterprises' shares, indicating that corporations use
earnings management through the cost of goods sold
manipulation. However, this behavior will not result
in future growth of the market return on shares of
industrial enterprises. The findings also reveal that
anomalous values of cash flows from operating
activities have a considerable positive impact on the
market return of shares for industrial enterprises,
indicating that corporations engage in earnings
management by manipulating cash flow from
operational operations to boost the market return of
industrial enterprises' shares in the future. These
findings are consistent with previous research that
suggests the use of earnings management techniques
by corporations to achieve higher market returns for
shareholders, [25], [26], [27]. The study's results
provide valuable insights for investors, regulators,
and other stakeholders in understanding the impact
of earnings management on the market return of
industrial enterprises' shares in Jordan.
6 Conclusion
In future studies, the researcher recommends
including variables such as sales value and
expanding the scope of the study to include a
sample of enterprises from various industrial sectors
to enhance the features of earnings management via
real-world activities of other variables. Additionally,
this study's findings demonstrate that actual earnings
management through manipulation of operational
cash flow activities affects the market return of
shares for industrial enterprises, providing decision-
makers with an additional independent variable to
consider. However, limitations of this study include
data gathered solely from www.ase.com, which
resulted in some enterprises being excluded due to
insufficient data. Furthermore, the study did not
account for whether the enterprise collected more
samples of corporate assets during the study period.
The study conducted by the authors in this paper has
various advantages, including improving our
understanding of earnings management by assessing
the influence of genuine earnings management
operations on the market returns of Jordanian
industrial businesses' shares. The report provides
significant information for investors, regulators, and
stakeholders, allowing them to make more informed
investment decisions and implement more effective
policies. It also has practical applications for
organizations, suggesting potential profit
management measures to increase shareholder
value. Furthermore, the paper recommends potential
research possibilities, such as including new factors
and broadening the scope across many industrial
sectors, to increase our knowledge of earnings
management and its implications on market returns.
Several aspects that can be addressed in future
research are among the study's shortcomings. For
starters, the data gathering method was primarily
based on information collected from the website
www.ase.com, which may have resulted in the
removal of certain businesses owing to a lack of
data availability. To address this problem, future
research should collect data from numerous sources
or use other databases to ensure a more
representative sample of industrial organizations.
Another suggestion for improving this study is to
include other factors, such as sales value, to better
the analysis of profits management through real-
world activities. The study can give a more
thorough knowledge of the factors driving earnings
management methods and their influence on market
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DOI: 10.37394/23207.2024.21.12
Khaled Eriej Aburisheh, Laith Akram Muflih Al-Qudah,
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Faris Alkarabsheh, Leqaa Naife Al-Othman, Hani Al-Azab
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returns by considering a larger collection of
variables.
In terms of future directions, broadening the
scope of the study to include a sample of businesses
from diverse industrial sectors will improve the
findings' generalizability and application.
Examining earnings management techniques across
industries can give insights into sector-specific
tendencies and assist in identifying unique earnings
management difficulties and possibilities.
Furthermore, future research will benefit from
investigating the impact of collecting more samples
of business assets during the study period. This
might provide a more sophisticated view of how
asset accumulation and earnings management
behaviors interact.
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APPENDIX
Table 6. Pearson Correlation
Correlations
Return
on
Equity
%
Return
on
Assets
Corporation
Size
Cost of
Goods
Sold
Production
cost
Operational
Cash Flow
Earnings
Per Share
Corporation
Growth
Return on
Equity %
Pearson
Correlation
1
Sig. (2-
tailed)
N
10
Return on
Assets
Pearson
Correlation
.992**
1
Sig. (2-
tailed)
0
N
10
10
Corporation
Size
Pearson
Correlation
0.338
0.337
1
Sig. (2-
tailed)
0.339
0.341
N
10
10
10
Cost of
Goods Sold
Pearson
Correlation
0.424
0.5
.708*
1
Sig. (2-
tailed)
0.222
0.141
0.022
N
10
10
10
10
Production
cost
Pearson
Correlation
-0.017
-0.029
.730*
0.372
1
Sig. (2-
tailed)
0.963
0.938
0.016
0.29
N
10
10
10
10
10
Operational
Cash Flow
Pearson
Correlation
.849**
.854**
0.456
0.553
0.132
1
Sig. (2-
tailed)
0.002
0.002
0.185
0.097
0.717
N
10
10
10
10
10
10
Earnings Per
Share
Pearson
Correlation
.996**
.987**
0.339
0.434
-0.004
.862**
1
Sig. (2-
tailed)
0
0
0.338
0.21
0.99
0.001
N
10
10
10
10
10
10
10
Corporation
Growth
Pearson
Correlation
-.831**
-.810**
-0.22
-0.295
0.231
-.747*
-.811**
1
Sig. (2-
tailed)
0.003
0.004
0.541
0.409
0.521
0.013
0.004
N
10
10
10
10
10
10
10
10
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
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Table 7. Regression Analysis Testing the Relationship between Corporation Size, Cost of Goods Sold,
Production cost, Operational Cash Flow, Earning per Share, and Corporation Growth towards ROA
Coefficientsa
Model
Unstandardized Coefficients
Standardized Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
2.615
8.529
.307
.779
Corporation Size
-1.701
3.515
-.078
-.484
.661
Cost of Goods Sold
3.164
2.237
.161
1.415
.252
Production cost
-.958
12.897
-.010
-.074
.945
Operational Cash Flow
-1.690
5.129
-.053
-.329
.764
Earnings Per Share
29.777
5.016
.953
5.937
.010
Corporation Growth
-.556
1.887
-.044
-.295
.787
F
51.642
R Square
.985
Adjusted R Square
.966
a. Dependent Variable: Return on Assets
Table 8. Regression Analysis Testing the Relationship between Corporation Size, Cost of Goods Sold,
Production cost, Operational Cash Flow, Earning per Share, and Corporation Growth towards ROE
Coefficientsa
Model
Unstandardized Coefficients
Standardized
Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
-.253
6.380
-.040
.971
Corporation Size
.552
2.629
.019
.210
.847
Cost of Goods Sold
-.138
1.673
-.005
-.082
.940
Production cost
.205
9.647
.002
.021
.984
Operational Cash Flow
-2.671
3.837
-.062
-.696
.536
Earnings Per Share
41.066
3.752
.984
10.946
.002
Corporation Growth
-1.291
1.411
-.076
-.915
.428
F
106.952
R Square
.998
Adjusted R Square
.995
a. Dependent Variable: Return on Equity
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Table 9. Regression Analysis Testing the Relationship between Corporation Size, Cost of Goods Sold,
Production Cost, Operational Cash Flow, ROA, ROE, and Corporation Growth towards EPS
Coefficientsa
Model
Unstandardized Coefficients
Standardized Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
.109
.067
1.613
.248
Corporation Size
-.090
.032
-.129
-2.799
.107
Cost of Goods Sold
.122
.034
.194
3.589
.070
Production cost
-.045
.096
-.015
-.466
.687
Operational Cash Flow
.075
.036
.073
2.071
.174
ROE
.051
.007
2.112
7.434
.018
Growth
.045
.015
.110
2.956
.098
ROA
-.036
.009
-1.135
-3.979
.058
F
543.288
R Square
0.999
Adjusted R Square
0.998
a. Dependent Variable: EPS
Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
The authors equally contributed in the present
research, at all stages from the formulation of the
problem to the final findings and solution.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
No funding was received for conducting this study.
Conflict of Interest
The authors have no conflict of interest to declare.
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
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