Earnings Management And Privatisations: Evidence From Pakistan Evidence From Pakistan

Abdullah Muhammad Iqbal, Iram Khan, Zeeshan Ahmed

Abstract


This study examines the incidence of earnings management
around the time of the privatisation of State Owned Enterprises in
Pakistan during 1991-2005. Using the modified Jones model and a sample
of large privatisations (minimum US$1 million), it shows that the
sampled firms experienced increase in earnings, decrease in cash flows,
and increase in current discretionary accruals in the year prior to
and/or in the year of privatisation. The SOEs used both short term and
long term accruals to inflate reported earnings. These accruals were
reversed in the post-privatisation period. These findings suggest that
managers of the firms slated for privatisation were engaged in earnings
management to inflate their firms‘ financial worth to maximise the
privatisation proceeds. Hence, we cannot reject the incidence of
earnings management during privatisations in Pakistan. The results imply
that the investors should carefully evaluate the to-be-privatised firms
and keep in view the possibility of earnings management by the SOEs. JEL
Classification: G14, G34, G38, L33, M41 Keywords: Earnings Management,
Privatisations, SOEs, Pakistan, Accruals

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DOI: https://doi.org/10.30541/v54i2pp.79-96

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