Secondary data are used for the estimation of earnings management proxies and to test the research hypotheses. To this end, this section demonstrates population selection procedures and the method used to process and collect secondary data.
5.6.1. Population Selection:
The data set of the current study comprises manufacturing firms listed on Amman Stock exchange (ASE) for four consecutive years of reporting periods from 2005 to 2008. The study period is restricted to those four years in particular due to the layout of data in ASE data base. The data base comprises excel sheets, one for each listed firm, that contain all financial information from the date on which the ASE data base has been established. In
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2005, however, the layout of balance sheet, income statement and statement of cash flow items has been improved (i.e. slightly changed) by the administrators of ASE. This has resulted in the production of new separate excel sheets starting from 2005. Accordingly, the period study starts from the year 2005 to avoid mistakes that might arise from collecting and matching financial data from two excel sheets with different layouts. Moreover, starting from the year 2005 makes this study viable since the effort and time are utilised in manually collecting non-financial data. At the other end of the period study, the year 2008 is chosen because the new sheets did not include the financial information concerning the year 2009 until November, 2010. Besides, the non-financial data for the year 2009 are still unavailable.
The manufacturing sector is chosen for several reasons. First, the International Financial Reporting Standards (IFRS) offer more flexibility to managements of manufacturing firms to choose among a number of treatment alternatives for the same accounting transaction (e.g. several measurement options). Second, manufacturing firms have several different accounts compared to service and financial firms, which in turn reduces the comparability between companies. Third, the manufacturing sector in Jordan is considered as a cornerstone for the local economy.
Two initial populations are drawn from the manufacturing sector corresponding to the two types of earnings management. To avoid survivorship bias, newly listed and delisted firms are included in the years they have gone public and off the market, respectively.
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A slight difference in the number of included firms arises due to data requirements of the type of earnings management22. Afterwards, (21) firms are excluded from each population in each year as follows, (14) firms that belong to mining industry and (7) firms with missing values. Table 5.1 summarises the selection procedures of the final populations sizes.
Table 5.1. Selection Procedures and Sizes of Final Populations
Description 2008 2007 2006 2005 Pooled
Initial populations for:
The first model 75 72 72 71 290
The second model 72 72 67 69 280
Excluded firms from all
populations
(21) (21) (21) (21) (84)
Preliminary populations for:
The first model 54 51 51 50 206
The second model 51 51 46 48 196
Outliers: The first model
Accruals 2 4 2 1 9
The second model
CFO 3 3 6 7 19
PROD 2 1 1 1 5
DISEXP 6 5 3 3 17
Final populations for:
The first model
Accruals 51 49 50 50 197
The second model
CFO 48 48 40 41 177
PROD 49 50 45 47 191
DISEXP 45 46 43 45 179
22 That is, while accruals model (i.e. the first sample) requires financial data from one previous period, real
activities models (i.e. the second and third samples) require financial data from two previous periods. This in turn reduces the number of firms in the second and third samples due to newly listed companies. In details, two firms have gone public in 2004 and hence have been included only in the first sample of the year 2005. Although these two firms have been excluded from the other two samples in 2005 (obviously because they did not have sufficient data for the calculation of the “change in lagged sales”), they have qualified for inclusion in the second and third samples in 2006. Moreover, five firms have gone public and four firms have been delisted in 2005. As a net effect in year 2006, the first sample shows an increase by one firm (i.e. 5 – 4), yet the second and third samples show a decrease only by two firms because of the other two firms that have gone public in 2004 (i.e. 4 – 2). With no change in 2006 the five firms that have gone public in 2005 appear in the second and third samples of the year 2007. Finally, three firms have been listed in 2007 and hence they appear as an increase only in the first samples of 2008.
155 5.6.2. Data Collection Method:
As mentioned earlier, the present study investigates the phenomenon of earnings management and its deterrence mechanisms in Jordan. Therefore, secondary data of manufacturing listed firms are manually collected from annual reports that are publically available in ASE data base. The period study covers four consecutive reporting periods from 2005 to 2008.
ASE produces two files for each listed company. The first file (i.e. excel sheet) contains financial data including balance sheets, income statements, statements of cash flow and few financial ratios. Therefore, financial data for dependent variables and three control variables are manually processed then collected from the excel sheets.
The second file (i.e. PDF) contains non-financial data that are limited to,
- Percentages of shareholdings held by each category of investors (e.g. individuals, institutions and foreign investors).
- The names of directors, Chairman and Chief Executive Officer (CEO),
- The names and percentages of block-holders who own 5% or more of firm’s equity share capital, and
- The names of external auditors.
Therefore, non-financial data for the variables of ownership structure, external auditor and the remaining control variable (i.e. board size) are manually processed then collected from the PDF files.
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