The Impact of Financial Distress, Firm Size, and Audit Quality on Earnings’ Management Evidence from Companies listed in the Egyptian Stock Exchange

Abstract

The way through which financial distress impact companies is the core of the economy especially after the COVID 19 wave all over the world. The main aim of the paper is to test the impact of Financial distress, firm size, and audit quality on earnings management. The study is applied on a sample of 42 companies listed in the Egyptian stock exchange market from the period 2015-2017. The paper main contribution is to add to the accounting literature of the financial distress and earnings management in the Egyptian environment as one of the leading developing countries in MENA region. The main research objective is to examine the relation between the financial distress, firm size, and audit quality from one side and earnings management from other side. This can help in understanding the behavior of earnings management in practice regarding these stressful variables. The researchers used regression analysis to find out the specific causal relationship among the research variables. The research results show that financial distress and audit quality are significantly impacting earnings management practices meanwhile the study failed to find a significant effect for firm size on earnings management within the Egyptian companies listed in the stock exchange market. The regression model include both variables and excluding firm value showed a 48.6% explanation power for explaining the change in the dependent variable. The limitation of the research is related to the other variables not considered in the study and the time period that included only 2015-2017. The main recommendation of the researchers that this study to be extended to include larger sample and a recent period to include the financial distress resulted by COVID 19 pandemic.