Earnings management and short-term market reaction: does narrative impression management matter in Egypt?

Abstract

Purpose: This study aims to investigate the joint effect of discretionary accrual-based earnings management (DABEM) and narrative impression management (IM) on short-term market reactions (STMR) and asks whether favourable narrative framing can offset investors' negative reactions to aggressive accruals in the Egyptian capital market.

Design/methodology/approach: This study uses a sample of 200 firm-years from 40 non-financial companies listed on the Egyptian Stock Exchange (EGX) between 2020 and 2024. Descriptive statistics, OLS regressions with heteroskedasticity-robust standard errors, robustness checks, and potential relationships among the variables form the basis of the discussion.

Findings: Discretionary accruals have a statistically significant negative influence on short-term market reactions. Thus, investors respond negatively to accrual management practices. Impression management does not significantly moderate the negative influence of discretionary accruals on market reaction.

Practical implications: Adverse investors' reactions to discretionary accruals can be considered evidence of an effective market discipline mechanism and increased investor attention to earnings quality, considering the regulations introduced in 2020. However, it is essential to acknowledge that discretionary accruals may also be associated with regulatory pressure, changes in investor behavior, or economic instability unrelated to improvements in the analytical ability of the investor. Therefore, more emphasis should be placed on regulatory enforcement, increased audit efforts and narrative disclosures.

Originality/value: This study adds to the literature on disclosure in emerging markets by providing empirical evidence on the working mechanism of financial and narrative manipulation in the context of the Egyptian transition after 2020. It also enhances the explanatory power of narrative signals and signaling and attribution theory in the context of low enforcement by thereby potentially undercutting the authority of narrative signals, even to complement financial manipulation.