Does the quality of voluntary disclosure constrain earnings management in emerging economies? Evidence from Middle Eastern and North African banks
| Pages | 91-126 |
| DOI | https://doi.org/10.1108/IJAIM-07-2020-0109 |
| Date | 18 September 2020 |
| Published date | 18 September 2020 |
| Subject Matter | Accounting/accountancy,Accounting methods/systems,Accounting & finance |
| Author | Rami Ibrahim A. Salem,Ernest Ezeani,Ali M. Gerged,Muhammad Usman,Rateb Mohammmad Alqatamin |
Does the quality of voluntary
disclosure constrain earnings
management in emerging
economies? Evidence from Middle
Eastern and North African banks
Rami Ibrahim A. Salem
Department of Accounting and Finance, University of Central Lancashire, Preston,
UK and Department of Accounting and Finance, University of Gharyan, Gharyan,
Libyan Arab Jamahiriya
Ernest Ezeani
Department of Accounting and Finance, De Montfort University, Leicester, UK
Ali M. Gerged
Department of Accounting and Finance, Faculty of Business and Law, De
Montfort University, Leicester, UK and Department of Accounting, Misuratu
University, Misrata, Libyan Arab Jamahiriya
Muhammad Usman
Department of Accounting and Finance, University of Central Lancashire,
Preston, UK, and
Rateb Mohammmad Alqatamin
Department of Accounting, Tafila Technical University, Tafila, Jordan
Abstract
Purpose –This study aims to examine the influence of the quality of voluntary disclosure (QVD) on
earnings management (EM) amongst a sample of commercial banks in the Middle East and North Africa
(MENA) region.
Design/methodology/approach –Using a sample of1,060 bank-year observations for the period 2006–
2015, this paperdeveloped a three-dimensional frameworkto measure the QVD, which considers the quantity,
spread and usefulness of the information. Furthermore, this study examines the QVD-EM nexus using an
ordinary least squares regression model. This technique is supplemented with conducting an instrumental
variable regression model and a two-stage least squares model to overcome the potential occurrence of
endogeneityproblems.
Findings –The findings suggest that QVDis negatively attributed to EM in the context of MENA banks.
The findings also confirm that the quality of financial reportingis enhanced by QVD dimensions that were
considered in the framework, leadingbanks to less engagement in EM practices. In contrast, the influence of
the quantity dimension (level) of the disclosed information has an insignificant impact on EM, while the
spread and usefulnessdimensions of VD are negatively and significantlyassociated with EM in the region.
Research limitations/implications –Although the results are robustto various measurements and to
the possible occurrence of endogeneityproblems, there are a few limitations should be acknowledged, which
provides opportunities for future research. For example, the sample size is relatively small due to data
Quality of
voluntary
disclosure
91
Received17 July 2020
Revised2 August 2020
Accepted10 August 2020
InternationalJournal of
Accounting& Information
Management
Vol.29 No. 1, 2021
pp. 91-126
© Emerald Publishing Limited
1834-7649
DOI 10.1108/IJAIM-07-2020-0109
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1834-7649.htm
accessibility issues.Likewise, the findings of the research might not be appropriate for non-financial sectors.
These limitations providea good opportunity for future studiesto expand on the research by covering other
developingeconomies and, thereby, enriching the understandingoffered by this study.
Practical implications –This study offers several implications for bank managers, academics and
policymakers. Firstly, it may help managers to appreciate the function and the importance of QVD in
mitigating EM. Secondly, for academics, the studyprovides suggestive evidence on the impact of QVD on
EM; however, futureresearch may need to consider the role of morality andethical behaviour across different
environments in reducingexcessive risk-taking and constraining earnings manipulation. Finally, it provides
insights for policymakers and regulators to develop a framework or guidance that can help banks in
providinghigh-QVD in the context of developing economies.
Originality/value –The study distinctively develops an innovative measurementfor QVD using a new
multi-dimensional model. This paper also bring new evidence on QVD complexity and its impact on EM
practicefrom an under-researched developing context, namely,the MENA region.
Keywords MENA region, Earnings management, Discretionary loan loss provisions,
Quality of voluntary disclosure, The MENA region
Paper type Research paper
1. Introduction
The recent financial crisis has shown the insufficiency of the information disclosed by
financial firms and their high level of asymmetric information. For example, the
bankruptcies of LehmanBrothers were due to poor financial reporting quality, which misled
users, causing them to make inaccurate decisions (Jones and Finley, 2011). The failure of
these firms has placed additional pressure on professional-standard setters’bodies and
listed firms to raise the quality of disclosures(Beretta and Bozzolan, 2008). The information
asymmetry betweenmanagers and owners may occur when managers opportunisticallyuse
earnings manipulations to maximise their interests, leading to poor financial reporting
quality, which decreases shareholders’confidence in the disclosed information (Cai et al.,
2020;Bigus and Häfele, 2018).
Previous earnings management (EM) studies (Alzoubi, 2016;Katmon and Al Farooque,
2017;Rezaee and Tuo, 2019;Suteja et al.,2016) suggested that EM is classified into either
opportunistic or informative behaviour. In opportunistic behaviour, managers mislead
investors to protect their reputation and secure more remuneration. In contrast, from an
informative perspective, managers might disclose more relevant information to the
investors. Distinguishing between informative practice and opportunistic behaviour is not
easy without consideringmanagerial incentives to manipulate earnings figures.
Although a considerable body of prior studies examined the impact of voluntary
disclosure (VD) on EM (Katmon and Al Farooque, 2017;Rezaeeand Tuo, 2019;Suteja et al.,
2016), there is still an existing gapin the literature related to the measurement of VD. When
examining the relationship betweenVD and EM, two VD measurement methods have been
used. The first method used the level and quantity of the disclosed information to measure
VD. However, this method neglects some important dimensions, such as the spread and
usefulness of VD that distinguish the disclosed information. The second method uses
subjective analyst disclosure quality rankings (Francis et al., 2008;Husted and De Sousa-
Filho, 2018;Muttakin et al., 2015;Sun and Rath, 2010). Such indices may not be widely
applicable for availabilityand transparency reasons (Chatterji et al.,2009).
The motivations of this study are two-fold. Firstly, we go beyond previous studies that
ignore the effect of spread and usefulness dimensions in measuring quality of voluntary
disclosure (QVD) (Alotaibi and Hussainey,2016;Alturki, 2014;Francis et al., 2008;Habbash
et al., 2016;Lobo and Zhou, 2001;Muttakin et al.,2015). Therefore, we contribute to the
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existing body of literature by developing a comprehensive framework that considers three
dimensions (i.e. quantity, spread and usefulness) to captures the QVD and examine the
QVD-EM nexus. Secondly, to date, a study examining the impact of VD on EM in the
banking sector is virtually non-existent. The extantliterature of the influence of VD on EM
provides inconsistent outcomes. For instance, Katmon and Al Farooque (2017) found that
VD is negatively associated with EM. Conversely,Prior et al. (2008) have reported that VD is
positively associated with EM. This paper, therefore, addresses this gap by examining the
VD-EM nexus using a data set that has been manually collected from commercial banks
operating in the Middle East and North Africa (MENA) region. This also brings a new
perspective leadingto a unique contributionto QVD and EM literature.
This paper investigates the extent to which the QVD and EM are statistically and
theoretically correlated. Theoretically, managers may voluntarily disclose high-quality
voluntary information to mitigate information asymmetry further to signalling their
superior performance to those interested in their information (Miller, 2002). Hypothetically,
it is expected that managerswho voluntarily release high-quality informationare unlikely to
engage in earnings manipulation. As high information asymmetry is likely to result in EM
practice, the QVD is assumed to mitigate the information gap between agent and principle.
Thus, QVD is considered as a vital instrument to monitor executive’opportunistic
behaviour and constrain the incidence of EM practice (Bushman and Smith, 2001).
Furthermore, the magnitude of EM is less likely to be correlated to the level of VD, which
implies a compensatory relationship, meaning that firms with poor quality disclosures
might attempt to gain legitimacy by disseminating more information voluntarily to
compensate stakeholders for the inadequacy of the disclosed information (Rodríguez-Ariza
et al.,2017).
In our study, we use a sample of 106 commercial banks listed in 17 MENA stock
exchanges covering a 10 year period. Our study used loan loss provisions (LLP), which is
widely used in the banking industry as the main tool for managing EM (Kwak et al.,2009;
Leventis et al.,2012). The extent of LLP for each sample firm-year was estimated using
Kanagaretnam et al.’s(2004)model. Our empirical findings suggested that banks that
provide high QVD appeared to be less engaged in EM. Additionally, we found no evidence
on the association betweenthe quantity (level) of VD and EM in the MENA region.
Our study makes the following contributions. Firstly, prior VD-to-EM studies were
confined to examining the relationship between the level of VD and EM (Katmon and Al
Farooque, 2017;Rezaee and Tuo, 2019;Sutejaet al., 2016). Our study, therefore, extends the
body of previous literatureby considering the collective effect of VD quality and quantityon
the engagement in earnings manipulation in the banking sector. To achieve this objective,
we develop a three-dimensionalframework to measure the QVD. This framework takes into
consideration the quantity, spread and usefulness of the information disclosed voluntarily,
which is regarded as the most comprehensive proxy for disclosure quality. This allows for
in-depth descriptionsof the patterns and the nature of the disclosed information.
Secondly, while previous studies have documented that the information asymmetry
levels amongst non-financial institutions are very high (Alotaibi and Hussainey, 2016;
Mersni and Othman, 2016;Moumen et al., 2016), there is still an insufficient substantiation
on the effect of VD on EM in the banking sector. Thus, we fill this gap by using data from
commercial banks operating in 17 MENA countries. Also, our paper is, to the best of our
knowledge, the first study to offer springboard of the relation between QVD and EM in the
financial services sector. Thirdly,we also extend the recent work of Alotaibi and Hussainey
(2016),Mersni and Othman (2016) and Moumen et al. (2016) on earnings manipulation and
VD by providing new evidence about the effect of QVD on EM in emerging economy
Quality of
voluntary
disclosure
93
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