FIRM PERFORMANCE AND EARNINGS MANAGEMENT STRATEGIES: EVIDENCE BEFORE AND DURING THE COVID-19 PANDEMIC
DOI:
https://doi.org/10.35631/AIJBES.829040Keywords:
Accrual Earnings Management, COVID-19 Pandemic, Earnings Management, Firm Performance, Real Earnings Management, Return on AssetsAbstract
The COVID-19 pandemic led to significant economic issues that influence companies to change their business operations and financial reporting practices. This study examines the effect of firm performance on the selection of corporate earnings management (EM) strategies among Malaysian public listed companies before (2018–2019) and during (2020–2021) the COVID-19 pandemic. It is focusing on two different EM measurements, which are accrual earnings management (AEM) and real earnings management (REM). Using a sample of 336 firm-year observations from Malaysian public listed companies, AEM was measured using discretionary accruals based on the Modified Jones Model (1991), while REM was measured using Roychowdhury’s (2006) model. Firm performance was evaluated using Return on Assets (ROA). The empirical results indicate a significant difference in the impact of firm performance on reporting behaviour between the two periods. ROA had no significant effect on AEM before the pandemic (2018–2019). However, ROA had a significant negative relationship with AEM during the pandemic (2020–2021). It indicates that firms with poor performance were more likely to use accrual manipulation to mask poor financial performance. In contrast, ROA maintained a consistent positive relationship with REM across both timeframes. Further analysis also suggests that poorly performing firms were more likely to engage in specific REM activities during the pandemic. EM practices were also significantly affected by other control variables, including financial distress, leverage, firm size and liquidity. Overall, these findings reveal macroeconomic shocks fundamentally alter how firm performance influences corporate EM choices. It offers a crucial insight for regulators refining oversight policies, auditors identifying high-risk financial reporting, and investors assessing earnings quality during global macroeconomic shocks.
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