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Volume 13 Issue 10 Version 1.0 Year 2013
Type: Double Blind Peer Reviewed International Research Journal
Publisher: Global Journals Inc. (USA)
Online ISSN: 2249-4588 & Print ISSN: 0975-5853
TheImpactofEarningsManagementonStockReturnsTheCaseofTunisianFirms
© 2013. Sonia Sayari, Fayçal Mraihi, Alain Finet & Abdelwahed Omri. This is a research/review paper, distributed under the terms of the
Creative Commons Attribution-Noncommercial 3.0 Unported License http://creativecommons.org/licenses/by-nc/3.0/), permitting all
non-commercial use, distribution, and reproduction inany medium, provided the original work is properly cited.
The Impact of Earnings Management on Stock
Returns: The Case of Tunisian Firms
Sonia Sayari α, Fayçal Mraihi σ, Alain Finet ρ & Abdelwahed Omri Ѡ
Abstract - Measuring earnings management is a crucial issue studies report results confirming interest in earnings
for stockholders and investors alike. Investors’ efficient management (Brochet and al ,2012) and the reverse is
evaluation of a firm (firm performance and its stocks returns on true (Courteau and al, 201). These mixed results in the
the stock market) depends on the selection of a measurement
literature are justified by the difficulty in giving a universal
Year 2013
model appropriate to earnings management. Within this line of
definition to earnings management concept and the
thinking, our study aims at presenting and comparing four
earnings management measurement models examining limitations of the adopted methodologies. Then, this
Tunisian stock market information content and the ability to debate exists since ever and cannot be resolved in a
forecast managers’ behaviour. We classified the variable very simple manner. Our study is motivated by lack of
“discretionary accruals” into higher and lower levels and then empirical studies focusing on measuring effect of 51
analysed its effect on returns. The obtained results point to a earnings management on stock prices within the
significant coefficient for the two levels of discretionary
Global Journal of Management and Business Research ( C ) Volume XIII Issue X Version I
Tunisian context, mainly because accounting legislation
accruals (according to the four models). This confirms that is known for its fiscal and accounting rigidity which
discretionary accruals allow Tunisian investors to better
hinders frequent changes of accounting methods and
evaluate firm value and optimally form their stocks portfolios.
requires that financial communication content should
Moreover, this study highlighted the determining role of firm
size. For this latter, earnings management allows for respect a certain number of rules notably in terms of
increasing abnormal positive stocks returns for large Tunisian publishing earnings. In a similar vein, according to
firms and reducing abnormal negative stocks returns for small Courteau (2011), use of Chtourou model (2001), seems
Tunisian firms. In conclusion, if these accruals measurement to produce an evolution in earnings management
models reach conclusions which are empirically reliable, this practice.
comes from the fact that they are very partial to reflect a Taking into account these lacks, a crucial
complex reality. question is raised on the possibility to confirm that
managers tend really to affect the Tunisian financial
market through earnings management?
E
arnings management is a crucial issue for To this end, we focused on investors’ behaviour
stockholders and investors. Investor’s evaluation with the aim of testing the effect of earnings publishing
of a firm (firm performance and stocks returns on on stock returns.
the financial market) depends on selecting a This choice has been adopted after reviewing
measurement model of earnings management. the theoretical and empirical models focusing on the
Our study aims at presenting and comparing topic and examining discretionary accounting practices,
four measurement models of earnings management in which affect published earnings while respecting both
terms of information content of the Tunisian stock accounting texts and rules. Such discretionary practices
market, trying to predict managers’ behaviour. relate nevertheless to manipulations which aim at
According to Selon Dechow and Skinner (2000) “the influencing a group or an individual to make them or
current research methodologies simply are not that him/her react accordingly.
good that identifying managers of firms that practice During these last years bankruptcy of Enron
earnings management”. Measurement problems and Wordcom has raised serious questions on earnings
imposed while detecting manipulation are numerous management practices. However, despite these
and complex (Dechow et al., 1995; Collins and Hribar, financial scandals, the accounting model remains an
1999; Courteau and al, 2011). informational vector enabling information users to
During these last decades, research conducted formulate or revise their expectations of the firm’s
on earnings management reached mixed results. Some economic perspectives. At the moment of announcing
accounting results, there appeared some speculations
Authors α Ѡ : Associate Professor Graduate Institute of Accounting that consequently influenced stock prices. Beaver
and Business Administration, University of Mannouba, Tunisia (1968), Ball and Brown (1968), Divesh Sharma (2003),
(ISCAE). Department of Accounting and Finance. David, Burgstahler (2004), Colasse (2004) and Scot and
E-mail : sayarisonia@yahoo.fr
Author σ : Professor Graduate Institute of management in Tunis. al (2011) showed that publicly announcing accounting
Author ρ : Lecturer at the Warocqué Faculty of Economics and results on the US market leads to a significant variation
Management. of stock returns the very day. There is a positive
This line of thinking, paradigmatic as it is, is known To this end, we present a the first section the
explicitly as earnings management relying on flexibility of fundamental aspects of earnings management and the
accounting conventions to declare higher profits. reaction of the financial market following this behaviour
Managers are led to maximise their financial while explaining the reasons likely to lead managers to
52 communication policy by presenting the market the manipulate accounting figures in view of either scoring
most successful image, exploiting insufficiencies of advantages, or communicating to investors their own
accounting rules. Indeed, retaining the most interesting anticipations on the firm’s future. The second section
Global Journal of Management and Business Research ( C ) Volume XIII Issue X Version I
norm inherent to accounting processing or a specific presents the used data and describes the methodology
position (French, IASC, FASB, international practices ..) used to measure earnings management as well the
adding hiding legal undertakings can only reinforce impact of this behaviour on stock prices.
context of information asymmetry that determines
market functioning. Managers play all tricks, both at the
level of form or content, to respond to markets a) Theories Explaining Earnings Management
expectations and requirements. According to efficiency theory, correlation
In Tunisia, few studies are conducted to between information and stock markets is noticeable.
examine the relationship between accounting Indeed, it is declared information which is supposed to
manipulation and returns, though the issue of be reflected in stocks and not accounting value in itself.
manipulation is regularly addressed by researchers. In this line of thinking, accounting modification which
However, in the US, many studies explicitly examined has no impact on cash flow cannot bring about any
as a topic or as a context of research earnings information to the market and cannot then affect the
management. Many recent studies like those conducted price as it has no effect on investors’ predictions and
by Mastumra (2003) and young (2005), attempted to expectations5.
determine the impact of accounting manipulation on the Studies focusing on phenomena related to
financial market. information content of accounting profits, highlighted
Our study on the Tunisian stock market answers investors tendency to focus on variations in earnings
to this perspective. Such an emerging and recent (Foerster, 2009; Yang and al 2011). These studies
market is characterised by a strong information matured into the functional fixation hypothesis according
asymmetry and a weak level of information efficiency. to which investors are not warned, hence unable to
These specificities may lead to identify earnings discover the effects of modifying accounting data on
management practices particular to the Tunisian market. cash flows (also accruals).
Then, we concern ourselves with the degree of the Often with reference to functional fixation
impact of this accounting practice on investors’ hypothesis, recourse to accounting results is a normal
behaviour. attitude as investors do not adopt any other source of
Indeed, the aim of this article is to observe information. Such behaviour is at the origin of this tight
whether Tunisian investors are aware of the presence combination between stock prices on the one hand and
of manipulation practices and whether this latter accounting changes on the other, independently from
encourages them to react during earnings publication. If cash-flows6.
information of financial statements is useful to investors,
like the case of net profits (Ball and Brown, 1968; 5
With regard to this rationality hypothesis, investors refer to cash-
Beaver, 1968; Zhen and al (2005), Foerster (2009), Yang flows expectancy and ot on accounting results to evaluate the firm.
6
and al (2011), Scott and al (2011), some accounting We should mention at this level that a study conducted by
Abdelmoula (1997) on the Tunisian financial market examined level of
practices carrying substantial information content are investors’ appreciation of different sources of information edited by
supposed to make the market react. Consistent with the firms listed on the Tunis Stock Exchange. The assumption in this
hypothesis of efficient markets in its partial form and with article presents balance and statement of account as the two essential
the hypothesis of rational anticipations, only the non- sources for evaluating Tunisian firms.
Year 2013
confirmed as a genuine tool of signalling market trends, accounting change on the published results. At this
in as much as they allow investors to better appreciate level, we may cite as an example of changing
the firm’s real value. accounting methods, the passage from a decreasing
The hypothesis recently used by researchers of amortisation of contributions to a linear amortisation.
accounting shows that there is information asymmetry Signal theory based on earnings management
between investors and managers. These latter dispose 53
is a financial communication tool as underlined by Zhen,
of private information on the situation and perspectives Xie et Xu (2005). These researchers contradicted the
Global Journal of Management and Business Research ( C ) Volume XIII Issue X Version I
of the firm and also on its capacity to generate future prejudice according to which earnings management get
cash flows. In this context, earnings management may investors mistaken and defend the thesis that
be used as a flexible tool allowing for transmitting to information value of published results is enriched. In
investors private information mainly their own opinions contrast to this thesis, other researchers support the
on the long-term strategy of the firm and to shape idea that earnings management is an attempt to fool
accounting information, within the limits of law. In stakeholders. Christensen et al (1999) experiment in
particular, accounting result is a variable on which their turn the possibility of reducing information value of
managers wish to act. As mentioned by Beaver (1989), published results through interference of potential
« no other figure in the financial statements receives motivations of earnings management (Zimmerman
more attention by investors’ community other than
2007).
earnings per share”7. Indeed, at the heart of this theory, More recent studies in the accounting field
manipulated accounting figures is an instrument to provided models in which these earnings management
signal market trends, is as much as they allow investors practices reveal a rational behaviour. In this line of
to better appreciate the firm’s value and build up, in an thinking, Hunt, Moyer and Shevlin (1995), Louis (2003)
optimal manner, their stocks portfolios. and Zhou (2003) support the idea of market value as
Many studies like those of Kim and Verrecchia positively related to reducing volatility of results through
(1991), Dontoh and Ronen (1993) and Bamber and discretionary management. Likewise, Subramanyam
Choen (1995) indicate that information asymmetry may (1996) indicates that information content of net earnings
guide sock prices reactions during publication of is superior to information content of non-discretionary
accounting information. Nevertheless, and according to results and cash-flow (Beyer 2009).
Watts and Zimmerman (1986), competition between
firms and motivation to attract the maximum of b) Studies of the Impact of Earnings Management on
investors, force managers to present accounting data Stock Return
modified in their favour. As a consequence, firm value is Referring to the hypothesis of information
either under-estimated or over-estimated on the market. validity of accounting manipulation, some researchers
According to information monopole line of thinking, have focused on the relationship between accounting
managers retain information about firm’s future at the figures and firm evaluation. Indeed, they tried to
expense of investors. Managers diffuse even on the examine whether manipulated accounting figures reflect
market private information that they hold through an more firm evaluation than non-manipulated figures. This
appropriate management of accounting results. is the same like examining whether investors are aware
Accordingly, Beaver (1968) and Morses (1981) underline of declared manipulated earnings and their impact on
that published accounting results have an information evaluating the firm’s stocks.
content in so far as their declarations are likely to pro- Empirical studies on this topic can be classified
7
The relationship between accounting results and stock rates is
into two categories detailed below.
probably the most important relationship in stock market analysis. Its The initial studies focused on correlation
importance is reflected on the attention investors give to the rate- studies8 which rely on the efficiency hypothesis of
profits ration. Accounting result corresponds to the sum of two
elements which correspond to financial flows or to « accruals » which 8
For readers interested in this methodology, please refer Dumontier
characterize committed accounting. (1999) and Raffournier (2002).
© 2013 Global Journals Inc. (US)
financial markets. This thesis assumes that stock value limited to an extremely rigid interpretation of accounting
is the best estimator of the firm’s real unobservable principle and rules. Subramanyam has shown indeed
value. In this line of thinking, ability to reflect listed stock that manipulated amounts are positively correlated to
value will be considered as the parameter that validates the firm’s market prices. The assumption is that
all accounting data. To this end, a number of manipulation represents an informational contribution
researchers determine degree of informativeness of an compared to firm value. In this line of thinking, Janin
accounting result through its level of correlation with the (2000) obtained similar results while conducting studies
real observed stock value. Subramanyam (1996), by on a sample of French firms, supporting further the
manipulating a sample in the US market, suggests to thesis of an improvement in the information content
measure correlation between stock value and a triple of published accounting figures, by accounting
measure of the result, i.e. declared net result, the result manipulation practices.
that could have been declared by the firm in the case of Subramanyam and Janin (2000) join on the
Year 2013
using a simple accounting method instead of a basic assumption that a manipulated result relects
committed accounting procedure and finally the result better firm potentials more than a non-manipulated
which should have been declared without manipulation. result. However, the authors do not specify whether
The second measure relates to global treasury excess investors use effectively this information superiority or
54 fixed as the objective of appreciating interest of a even whether they are aware of these manipulations.
committed accounting method in its systematic type. It The second category of studies based on
is about accounting or some types of products or costs
Global Journal of Management and Business Research ( C ) Volume XIII Issue X Version I
Year 2013
Elleuch (2002) shows that investors react to result presenting their accounts according to IFRS norms10 or
publication as if this latter was not manipulated. Since the US GAAP. Additionally, the Tunisian context is
they are short of elements allowing for detecting known for its ownership concentration of firms and for a
manipulations at that moment, Dumontier and Elleuch financial market with relatively less cash flow.
(2002) pointed to how investors react at the moment of In contrast to the US, in Tunisia, earnings
publishing detailed financial statements. They note a 55
announcement is subject to investors’ acute attention
positive correlation between manipulations and stock and is seen by them as an objective to reach. This
Global Journal of Management and Business Research ( C ) Volume XIII Issue X Version I
prices movements. This suggests on the one hand that encourages the firm to commit itself to earnings
investors are aware of manipulation, as they react management. It can then be deduced that the Tunisia
accordingly. On the other hand, this suggests that market may favor earnings management to the upward.
investors consider manipulation as rather informative, as Our study may improve our comprehension of earnings
rates variations and manipulation direction are of the management within an environment where financial
same signal. Indeed, a deeper analysis led them to information is geared towards stakeholders and not only
assert that it is the downward manipulation of earnings investors (shareholders).
which led to these rates movements, while upward
manipulations were with no significant effect on rates. It ii. Sample and Period of Study
seems then that although aware of accounting Data has been collected from accounting
manipulations, investors do not change evaluation of the statements of 33 firms quoted at the Stock Exchange of
firm, when they perceive an upward manipulation tactic. Tunis (BVMT) between 1999 and 2008.
However, they believe that downward manipulations The study is limited only to firms whose data is
signal that managers have rather pessimistic anti- fully available. Firms of the financial sector (companies,
cipations on the future of their firm. This leads them to insurance …) have been deleted as they cannot be
diminish firm value. studied in the same manner as others because of the
specific nature of their activities and financial state-
ments. Among the 33 retained firms, 7 have been
eliminated because of unavailability of relevant data.
iii. Earnings Management Measurement Models
Estimation models of retained accounting
The aim of this paper is to examine whether
accruals of our study are inspired by Jones’ model
discretionary accruals possess information content on
(1991), contributions of Dechow et al. (1991) and de
the Tunisian market and to test whether earnings
DeAngelo (1986)11. Cautious to compare, we have
management practices affect stock prices of Tunisian
adopted then Chtourou, Bedard and Courteau’s
firms. The methodology used to this end is that of event
procedure (2001) according to which discretionary
studies.
accruals are defined as residuals of this model:
a) Estimating Earnings Management for Tunisian firms
TAC ijt / A ijt 1 j (1/ A ijt 1 ) 1 j (REijt / A ijt 1 ) 2 j (PPEijt / A ijt 1 ) e ijt (1)
Year 2013
DACijt TAC ijt / A ijt j (1/ A ijt 1 ) 1 j (REijt / A ijt 1 ) 2 j (PPE/ A ijt 1 ) (4)
According to model 4, discretionary accruals (-0.13611) decreasing thus total accruals (-0.17154).
(-0.03543) stand similar to non-discretionary accruals
Table 2 : Descriptive statistics of discretionary accruals computed by model (5)
Year 2013
Model 5 TAC NDAC DAC
Variance 0.109891 0.152075 0.149515
Max 0.116965 0.152099 1.36601
Min -1.50451 -1.6179 -1.43053
Mean -0.17154 -0.19423 0.022692 57
According to model 5 and referring to the mean, behaviour, knowing that this latter measured by positive
Global Journal of Management and Business Research ( C ) Volume XIII Issue X Version I
we notice that total accruals (TAC) are negative discretionary accruals (DAC) (0.022692).
(-0.17154) despite the up-ward-oriented discretionary
Table 3 : Descriptive statistics of discretionary accruals computed by model (6)
Likewise, according to model 6, negative non- discretionary accruals (0.0219) at the level of total
discretionary accruals hide the positive effect of negative accruals (-0.14964).
Table 4 : Descriptive statistics of discretionary accruals computed by model (7)
profits to the downward by obtaining negative income taxes. According to Healy (1985), managing
discretionary accruals, while earnings for medium-sized accruals is to the downward if generated profits are
firms are managed to the upward as they record positive outside the limits fixed for remunerating managers in
discretionary accruals. As for small firms discretionary order to prove their competence by increasing their
behaviour is relatively unnoticed. future profits.
Model 5 results confirm model 4 results. This
a) Firm Sector and Discretionary Accruals
may explain the mood of each group of firms. Indeed,
According to Rafournier (1990), firms belonging
large firms want to decrease their results to avoid State’s
to highly-concentrated sectors prefer earnings-dimi-
interest in income tax. Medium-sized firms want to look
nishing method. In order to test the relevance of this
performing on the market to gain a better visibility,
hypothesis to Tunisian firms, we set ourselves to analyse
allowing for collecting external resources. Small firms
discretionary accruals for each sector. The results are
want to show reliability of their accounting information to
presented the following table and figures:
promote a positive image needed to their success.
Model 6 which relates to history of total accruals
was able to detect a positive discretionary behaviour for
small firms. Indeed, these latter had better prove their
increasing development in time to confirm possibility of
future existence in the market.
Model 7 which relates to the firm’s evolution
within its sector was able to detect earnings
management to the upward for small firms. Indeed,
these latter want to prove and show (to their external
environment) their competitive competence within their
sectors by reporting higher profits.
Year 2013
Tourism -0.01147 -0.00451 0 0.156277
Transport -0.02051 -0.01067 0 0.123929
Global Journal of Management and Business Research ( C ) Volume XIII Issue X Version I
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According to model 5, discretionary accruals are low for all sectors except the Leasing sector in which
firms tendto manage to the upward earnings (Figure 2).
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According to model 6, there are higher discretionary accruals for the Agro-food and Leasing
sectors(Figure 3).
Figure 4 : Discretionary accruals by sector computed with model (7)
60 accrual discrétionnaire 7par secteur
Global Journal of Management and Business Research ( C ) Volume XIII Issue X Version I
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Model 7, which considers behaviour by sector, ii. Sample and Period of Study
contradicts the other models and proves that Leasing As we have concluded in the third section, and
firms intensively manage their profits to the downward in order to obtain the most interesting estimations of
(Figure 4). parameters of the market model in terms of reliability
As a summary, we notice a difference in the and stability, the study period should be enough long
results of the four models. Indeed, model 4 falls short in and periodicity should be as short as possible. Then, we
pointing to the presence of discretionary accruals for the will estimate the market model by supposing that
leasing sector (Figure 1). According to model 5, announcement date is the date of the JORT (govern-
presented in Figure 2, the leasing sector retains the ment official laws bulletin) publication. However, use of
highest level of discretionary accruals compared to the daily data leads to missing data problems biasing thus
other sectors. In Figure 3 which presents model 6, we estimation results. To mend for this, we had better
detect higher levels of discretionary accruals for Agro- ignore stocks whose number of quotation days is low,
food and leasing sectors. Finally, Figure 4, presenting which enabled us to select the most-liquid 18 stocks to
model 7, detects negative discretionary accruals for the be presented below with their estimations.
leasing sector. iii. Methodology
b) Impact of Announcing Manipulated Earnings on the
test of « H0 » : RACM=0
Financial Market: An Application on the Stock
Exchange of Tunis Previous literature indicates that after having
In what follows, we present the to-be-tested fixed announcement date and estimation period, the first
hypothesis, the sample, study period, methodology and step consists in estimating the market model written by
the obtained results. equation 2, section three above.
i. Hypothesis The second step consists of computing
First, we will attest for the following hypothesis abnormal returns during event date. Indeed, we will
H0: there is no average abnormal return around date of compute during the 30 days around announcement
announcing manipulated earnings. date (15 days before and 15 days after) what follows:
Year 2013
each stock its 30-day cumulative abnormal return. 6, a value neatly superior to 2. Accordingly, we reject H0
Hence, cumulative abnormal return of a stock i during and confirm that on the whole earnings announcement
the event period is computed as follows: significantly and positively affects average cumulative
abnormal return. Hence, earnings announcement carries
15 information content that might significantly influence
RACi = RAit market reaction. This conclusion corroborates those of 61
t 15
Ball and Brown (1968) and Patell and Wolsfon (1984).
Global Journal of Management and Business Research ( C ) Volume XIII Issue X Version I
The fourth step consists of grouping together all Nevertheless, this conclusion needs further analysis to
the stocks and computing average cumulative abnormal prove with confidence that managers tend to influence
return of the sample “RACM” and testing H0 hypothesis the market, not by their good behaviour but rather
according to which this average cumulative abnormal through publishing accounting information manipulated
return is null. by discretionary accruals.
Grouping together stock will depend on b. Effect of discretionary accruals on average
discretionary accruals identified in the previous section cumulative abnormal returns « RACM »
according to the four models. This will enable us to point For each of the four accruals-determining
to the effect of this behaviour on stocks’ abnormal models, we classify first the 18 firms in a decreasing
returns. order according to level of discretionary accruals.
iv. Results and Interpretation of Hypothesis H0 Second, we classify them into three 6-firm groups. Third,
First, we test the effect of earnings we compute for each group corresponding average
announcement on abnormal returns without considering cumulative abnormal returns.
effect of manipulation by computing cumulative In order to better study the effect of
abnormal return of the entire sample. Then, we group discretionary accruals on average cumulative abnormal
together stocks into three categories according to level returns, we graphically report level of RACM of each
of discretionary accruals. At this level, we estimate group and for each model.
cumulative abnormal returns of each group and for each
of the four models used in section one above.
a. Average Cumulative abnormal returns « RACM »
of the entire sample
Cumulative abnormal return at the end of event
period for each stock is reported in the following table14:
Table 7 : Cumulative Abnormal Return
RAC RAC
ATL -0.11975 SOTETEL 0.017543
BIAT 0.106166 SOTUMAG 0.085684
BNA -0.10919 SOTUVER -0.0696
BS -0.18126 SPEDIT 0.056664
BT -0.00239 STB 0.325017
BTEI 0.072717 TUNISAIR -0.01999
CIL 0.00923 TUNISLEAS -0.02943
SFBT 0.093056 UBCI -0.04485
SIAM -0.02193 UIB -0.05085
14
Details about cumulative abnormal returns during the whole event
period are presented in appendix 3.
According to model 5, firms whose dis- norm. This leads us to conclude that upward earnings
cretionary accruals are positively high (group 1) have management increases positive abnormal returns and
interesting high returns compared to the estimated that downward earnings management increases
norm, whereas firms whose discretionary accruals are negative abnormal returns (Figure 5).
modest (group 2) record a return slightly superior to the
62 The results given by model 5 are reported in
norm. However, firms whose discretionary accruals are Figure 6 and confirm the results given by model 4.
negatively high (group 3) record a return inferior to the
Global Journal of Management and Business Research ( C ) Volume XIII Issue X Version I
0.02
0.01 Series1
0
gr1 gr2 gr3
-0.01
According to model 6, firms with a modest level increase in discretionary accruals (in positive and
of discretionary accruals (group 2) record the highest negative terms) tends to set the obtained returns around
positive abnormal returns. This leads us to conclude that the norm.
Figure 7 : RACM in terms of discretionary accruals computed with model (7)
0.06
0.04
0.02 Series1
0
gr1 gr2 gr3
-0.02
With reference to the results given by model 7, since earnings management to the downward (group 3)
we can conclude that the obtained returns deviate from may only lead to a slight deviation between obtained
the norm if the firm manages to the upward its earnings, returns and estimated ones.
Year 2013
-0.06
Finally, we can conclude that firms with high firms, applying four models of accruals estimation.
discretionary accruals have positive average cumulative According to (Healy and Wahlen(1999); Young(2011),
abnormal returns as indicated by all models (4, 5, 6, and earnings management intervenes once managers use 63
7). The second category of firms has a negative average their discretion in accounts and in structuring in view of
Global Journal of Management and Business Research ( C ) Volume XIII Issue X Version I
cumulative abnormal return for model 7 and positive for altering financial results either to fool third parties on the
models 4, 5, and 6. The last category has a negative firm’s real economic performance or to influence
average cumulative abnormal return for all models 4, 5, accounting figures. Accounting literature presented
6, and 7. This leads us to conclude that firms adopting a several models in which these practices report to
manipulative behaviour measured by high positive or rational equilibrium behaviour.
negative discretionary accruals have a positive Studying the Stock Exchange of Tunis, we
(negative) abnormal return during publication of their showed in our first empirical section that Tunisian firms
earnings. adopt earnings management behaviour measured by
As a summary, Tunisian managers may adopt discretionary accruals. In this study, we notice that large
an accounting policy allowing for hiding weaknesses in firms have in average negative discretionary accruals,
their management by influencing investors’ behaviour on using the results given by the four models. Rafournier
the stock market and by increasing the difference (1990) insists that large firms prefer reducing their
between real stock profits and those which could be earnings, because governments focus closely on their
achieved if no manipulated information has been profits to finance the state budget by leveraging higher
provided. Indeed, discretionary accruals behaviour taxes. Taking into account sector effect, we noticed
adopted by managers of firms listed on the Stock different results as given by the four models. Generally
Exchange of Tunis leads to returns, unusually amplified, speaking, firms belonging to highly-concentrated
associated with earnings announcement. sectors (leasing and agro-food) prefer results-
This enabled us to notice that investors within diminishing methods.
the Stock exchange of Tunis, unable to seize the effects In the second empirical section, we showed that
of changing accounting methods on earnings, may be firms adopting earnings management measured by
easily trapped by managers who adopt an earnings discretionary accruals have positive or negative
management policy allowing them to cover the firm’s discretionary accruals or positive (negative) abnormal
bad performance and financial difficulties. If the firm is in returns during results publication. These results enabled
difficulty, the manager tends to manage profits to the us to conclude that earnings management is a practice
upward and consequently investors over-evaluate adopted by Tunisian firms to influence investors’
stocks and returns obtained following earnings perception of the firm’s future returns and to provide
announcement will be superior to those generally them unexpected market results superior to their
observed. However, if the firm is performing well, the expectations.
manager tends to manage profits to the downward in Indeed, Tunisian managers may adopt an
order to minimise tax value and consequently investors accounting policy which allows for hiding their
under-evaluate stocks. At the time of earnings management practices. This is related to their influence
announcement, returns will decrease from their usual on investors’ behaviour and on the market, by
level. increasing the gap between real stock returns and that
which could have been achieved in case no
manipulated information was declared. Accordingly, we
Our answered two questions on the impact of notice that investors of Tunis Stock Exchange, unable to
earnings management on stock prices for Tunisian seize the effects of changing accounting methods on
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