Article2023

Mediating influence of earnings management in the nexus between audit quality and company value: new proof from Jordanian market

Malik Muneer Abu Afifa · Isam Hamad Saleh · Fatima Taqatqah

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Purpose This paper aims to recognize the direct influence of audit quality (AQ) on earnings management practices (EMP) and company value (CV), as well as the mediating role of EMP in the link between AQ and CV. It presents new factual proof from the Jordanian market, which is still in its early stages. Design/methodology/approach A pattern of 43 service firms listed on the Amman Stock Exchange (ASE) was collected for the timeframe (2012–2019), giving an amount of 344 firm-year observances. The data was collected from the annual reports extracted from the ASE’s database and tested with panel data analysis. Findings The results show that audit firm industry specialization positively affects EMP while its size and tenure do not, which implies that its industry specialization does not restrict earnings management but rather leads to an increase in opportunistic behaviors. Audit firm size and audit firm industry specialization positively affect CV, whilst audit firm tenure does not. Additionally, the findings indicate that EMP negatively affect CV, and EMP act as a mediator for the AQ–CV nexus. Research limitations/implications Stakeholders can use the findings to enhance the capacity and effectiveness of Jordan’s fiscal market. For example, our results will boost policymakers’ eagerness to institute suitable statutes improving Jordan’s fiscal market performance. Besides, the results can assist existing and potential investors make sound adjudication by using AQ proxies and earnings management as signals to predict future company’s value. Originality/value The paper differentiates itself from previous papers through initiating a new proposed model by exploring the role of earnings management as a mediator in the nexus between AQ and CV by presenting new factual proof from the Jordanian market.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1970The Market for "Lemons": Quality Uncertainty and the Market Mechanism 1991Earnings Management During Import Relief Investigations 2003Earnings Management through Real Activities Manipulation 2010Understanding earnings quality: A review of the proxies, their determinants and their consequences 1978Towards a Positive Theory of the Determination of Accounting Standards.2002The rewards to meeting or beating earnings expectations 1995Managerial ownership, accounting choices, and informativeness of earnings

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