Dr. Kawa Wali
Accounting and Finance Department, Salahaddin University, Erbil, Iraq
Email: [email protected]

Associated Professor Dr. Sabhi Saleh
Salahaddin University, Erbil, Iraq
Email: [email protected]

Professor Dr. Kees van Paridon
Erasmus University, Rotterdam, Netherlands
Email: [email protected]
DOI: 10.23918/ICABEP2019p38
(Full Paper)

This study uses a sample of Dutch and German listed companies to compare the performance of academic discretionary accruals estimation models. The actual accounting framework provides a wide scope for managers to influence data in financial reporting. Corporate reporting strategy, the manner in which managers use their discretionary accounting, has a significant effect on the company’s financial reporting. The authors contribute to the literature through improvement to these models to achieve better results of detecting earnings management as well as to present evidence that is particular to the Dutch and German setting. For this, we follow the methodology of Dechow, Sloan, and Sweeney (1995) and Chan et al. (2006) and test which model can detect Dutch and German firm’s earnings management better by applying those models to the artificially manipulated earnings after adding some amount to the reported earnings. This study found that earnings management was managed relatively more highly in Germany than in the Netherlands. The relationship between earnings management, stock returns, and corporate governance has been tested. Our results suggested that the strong or weak impact of corporate governance in these two countries varied. The multi-sectoral Jones model has a modest illustrative capacity. Finally, the results show that maximum discretionary accruals involve a large number of estimated errors which have a foreseeable effect on income, stock returns and future cash flows. The decrease in the level of earnings management indicates that the measurement error has been largely eliminated in the estimated performance-related accruals.

Keywords: Stock returns, reported earnings, accruals, cash flows, investors, corporate governance

International Conference on Accounting, Business, Economics and Politics

ISBN: 978-9922-9036-3-7