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Earnings Management and Privatisations: Evidence from Pakistan

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):

    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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    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.
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    4. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    5. Farinos, Jose E. & Garcia, C. Jose & Ibanez, Ana Ma, 2007. "Operating and stock market performance of state-owned enterprise privatizations: The Spanish experience," International Review of Financial Analysis, Elsevier, vol. 16(4), pages 367-389.
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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.
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    14. Fluck, Zsuzsanna & John, Kose & Ravid, S. Abraham, 2007. "Privatization as an agency problem: Auctions versus private negotiations," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2730-2750, September.
    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. 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.
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