THE IMPACT OF FINANCIAL PERFORMANCE AND ACTIVITY LEVEL ON REAL EARNINGS MANAGEMENT: EVIDENCE FROM ALGERIA

Abstract

The last decade has known a widespread interest in real earnings management by the literature, as a determinant of financial reporting quality. The interest of many studies has tended toward the investigation of the real earnings management determinants, so the aim of this study falls within this stream, by examining whether the financial performance and activity level have impacts on real earnings management in the Algerian companies. The study included a sample of 82 firm-year observations that concern 17 Algerian companies during the 5 years from 2015 to 2019. To test our hypotheses, we based on a multiple linear regression model that links the real earnings management, measured as the abnormal cash flows from operations, with the financial performance (Net income) and activity level (Sales). That model was estimated depending on the pooled regression method, after testing their validity. The results indicate that the impact of the financial performance level of the Algerian companies on their real earnings management level is not statistically significant. However, the results indicate a negative and statistically significant impact of the activity level of the Algerian companies on their real earnings management level. Therefore, the activity level can only explain the real earnings management level in the Algerian companies, the explanatory power of our model reaches more than 60%. These results are useful for users and auditors in Algeria, as they provide empirical evidence about the determinants of real earnings management in Algeria, which represents a determinant of financial reporting quality.