Earnings management during the oil price crisis

This paper investigates the impacts of oil price crisis on earnings management behaviour in Gulf Cooperation Council (GCC) countries. Starting in mid-2014, oil prices began to fall drastically, hereafter this is referred to as the oil price crisis. Earnings management is measured in terms of accrual based earning management (AEM) and real activity based earnings management (REM). The modified Jones model is adopted to estimate AEM, and three models from Roychowdhury (2006) are used to estimate REM. The results reveal that companies have tended to use downward REM during the oil price crisis, engaging less with AEM. Control variables covering firm characteristics, including ROA, leverage, growth and OCF exhibit significant relationships with EM. The present study examines EM during the oil price crisis, considering both accrual and real activity earnings management. In contrast to most previous research in this domain which has only considered upward REM, a nondirectional approach is used herein whereby the absolute (unsigned) term is applied to capture this metric.