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Earnings Management and Privatisations: Evidence from Pakistan

Author Info

Listed author(s):
  • Abdullah Muhammad Iqbal

    (Kent School, University of Kent, Medway, Chatham Maritime, UK and National University of Sciences and Technology, Islamabad, Pakistan.)

  • Iram Khan

    (Cabinet Division, Cabinet Secretariat, Islamabad.)

  • Zeeshan Ahmed

    (Lahore University of Management Sciences (LUMS), Lahore.)

Registered author(s):

    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.

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    File URL: http://www.pide.org.pk/pdf/PDR/2015/Volume2/79-96.pdf
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    Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

    Volume (Year): 54 (2015)
    Issue (Month): 2 ()
    Pages: 79-96

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    Handle: RePEc:pid:journl:v:54:y:2015:i:2:p:79-96
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    Keywords: Earnings Management; Privatisations; SOEs; Pakistan; Accruals;

    Find related papers by JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    References listed on IDEAS
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    1. Muhammad Farooq Arby, 2001. "Long-Run Trend, Business Cycles and Short-Run Shocks in Real GDP," SBP Working Paper Series 01, State Bank of Pakistan, Research Department.
    2. Siew Hong Teoh & Ivo Welch & T.J. Wong, 1998. "Earnings Management and the Long-Run Market Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 53(6), pages 1935-1974, December.
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    7. Claude Laurin & Anthony E. Boardman & Aidan R. Vining, 2004. "Government Underpricing of Share-Issue Privatizations," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 75(3), pages 399-429, 09.
    8. Narjess Boubakri & Jean-Claude Cosset, 1998. "The Financial and Operating Performance of Newly Privatized Firms: Evidence from Developing Countries," Journal of Finance, American Finance Association, vol. 53(3), pages 1081-1110, 06.
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    15. Arby, Muhammad Farooq, 2001. "Long-run trend, Business Cycle & Short-run shocks in real GDP," MPRA Paper 4929, University Library of Munich, Germany.
    16. repec:bla:joares:v:37:y:1999:i:2:p:387-413 is not listed on IDEAS
    17. Ahmad-Zaluki, Nurwati A. & Campbell, Kevin & Goodacre, Alan, 2011. "Earnings management in Malaysian IPOs: The East Asian crisis, ownership control, and post-IPO performance," The International Journal of Accounting, Elsevier, vol. 46(2), pages 111-137, June.
    18. Iram A. Khan, 2003. "Impact of Privatisation on Employment and Output in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 42(4), pages 513-536.
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