The Impact of Accrual and Real Earnings Management practices on Earnings Persistence and Predictability during Crises and Stability Periods: An Empirical Study in the Egyptian Listed Companies

Purpose: This paper aims to investigate the impact of earnings management practices of both types; through accruals (Accrual Earnings Management "AEM") and real activities (Real Earnings Management "REM"), on both earnings persistence (with their various components) in the future, and their predictability of future operating cash flows, over three consecutive future financial periods (as a forecasting period), the whole research period, and during crises periods compared to stability periods.
Design/Methodology: This paper uses a time series of archival data, Stata (V.17) and multiple regression models using fixed effects model, In addition to, robust standard errors to solve autocorrelation and heteroskedasticity. The researcher selects a convenient and purposive sample of (100) companies of non-financial companies traded on the Egyptian Stock Exchange, during the period from 2005 to 2023.
Results: The results show during the whole period, a decrease in earnings persistence in the future, as well as their predictability of future operating cash flows under the impact of earnings management practices, after one future period for AEM practices, and after several future periods (three future periods for maximum) for REM practices. Therefore, REM practices will be more harmful to earnings persistence and their predictability compared to AEM practices; due to the positive and significant relationship between AEM practices - that make up current earnings - and future earnings (future operating cash flows) after two future periods, while, at a decreasing rate after three future periods, until the accruals are converted into cash flows in the future; as these accruals reflect private information that management may have regarding future growth opportunities.
The results also indicate that, the predictability of earnings components upon future earnings decreases with more future periods. In general, under the impact of AEM practices, discretionary accruals will be the least persistent component of current earnings in the future, while operating cash flows (the cash component of current earnings) will be the most persistent in the future, followed by non-discretionary accruals. Also, the negative impact of REM practices on operating cash flows persistence (the cash component of current earnings) increases to a stronger degree than the persistence of accruals component. In addition, the previously mentioned results were validated to a stronger degree during crises periods, with increasing uncertainty of companies’ future growth, compared to stability periods.
Originality/Value: This paper adds to the body of knowledge by providing empirical evidence on the Egyptian listed companies regarding earnings persistence with its various components, as well as its predictability, considering the impact of earnings management practices of both types: (accruals and real activities), especially during crises periods compared to stability periods, in order to verify whether these practices enhance or weaken earnings persistence as well as their predictability.