Effect of earnings management on economic value added: G20 and African countries study

Zhen-Jia Liu, Yi-Shu Wang

Abstract


Background: Economic value added (EVA) may reflect true performance compared with other conventional accounting indices, it is still measured through financial statements. It is highly probable that EVA motivates managers to manipulate earnings.

Aim: The main contribution of this study is the analysis of the association between earnings management and EVA. This study provides shareholders, lenders and creditors (or other categories of investors) with a method for analysing the value of enterprises.

Setting: We analyse the association between earnings management through real earnings management (REM) or discretionary accrual (DA) activities and the EVA by African and the Group of Twenty (G20) nations.

Methods: The sample for this study was obtained from the COMPUSTAT database between 2009 and 2013. This study also adopted the ordinary least squares (OLS) method.

Results: The results indicate that a significantly positive relationship exists between earnings management through DA items and EVA in African nations. In addition, a significantly negative relationship exists between earnings management through DA items or REM activities and EVA in G20 nations.

Conclusion: Our results provide critical implications for managers, researchers, investors and regulators of various nations; for example, managers may determine whether to increase the EVA through earnings management, researchers may analyse varying degrees of REM activities and DAs existing in the same nation groups or regulators may determine how to establish laws or rules to prevent earnings management because it is likely that differences in national development, culture or politics exist in these nations.


Keywords


earnings management; economic value added; discretionary accrual; real earnings management

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DOI: http://dx.doi.org/10.4102/sajems.v20i1.1247

Submitted: 31 October 2014
Published: 25 October 2017


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South African Journal of Economic and Management Sciences    |    ISSN: 1015-8812 (PRINT)    |    ISSN: 2222-3436 (ONLINE)