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The Determinants of Earnings Management in Developing Countries: A Study

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 The Determinants of Earnings Management
in Developing Countries:
A Study in the Tunisian Context
Lanouar Charfeddine*, Rabeb Riahi** and Abdelwahed Omri***

This paper investigates the factors that determine earnings management in emerging
countries through the example of Tunisia. The empirical analysis is conducted by dividing
the factors into two principal groups—incentive group and constraint group—and by
using data of 19 Tunisian listed companies collected from the Tunisian stock exchange
for the period 2003-2009. To estimate discretionary accruals, three models, namely,
Dechow et al. (1995) (modified Jones model), Kothari et al. (2005) and Raman and
Shahrur (2008), have been used. In order to test for determinants of earning
management, the residuals of these models (discretionary accruals) are regressed on a
set of explanatory variables that are hypothesized to have an impact on earnings
management. Empirical analysis reveals that on the whole, the results seem to depend
on the model used to estimate the discretionary accruals. In particular, six (indebtedness,
firm size, performance, cumulation of the managerial and the board chair roles,
managerial propriety, and dividend policy) of the nine variables considered are found
to significantly determine earnings management. In addition, empirical results show
that three (firm size, cumulation of the managerial and the board chair roles, and
managerial propriety) out of the six determinants do not have a sign as expected.

Introduction
Manager intervention in accounting information is named in several ways, such as ‘cosmetic
accounting’ or ‘accounting manipulation’. The most frequently used term in the empirical
literature is ‘earnings management’. Schipper (1989) defines earnings management as a
manager intervention in external financial reporting process to appropriate personal gain. This
definition shows that earnings management phenomenon results in managers’ opportunistic
behavior. In fact, earnings management is a managerial practice that has been a result of
researches in positive accounting theory and agency theory and has emerged in the context
of information asymmetry between managers and other business partners. Otherwise, earnings
management can be examined in the context of efficient market theory. In this perspective,
managers are motivated to manipulate earnings in order to publish more informative disclosure
(Watts and Zimmerman, 1986).
* Assistant Professor, College of Business Administration, Najran University, Box 1988, Alsawady, 11111 Najran,
Saudi Arabia (KSA); and is the corresponding author. E-mail: Lanouar_charf@yahoo.fr
** Ph.D. Student, Higher Institute of Management of Tunis, 41, la Liberté Road, Bouchoucha 2000, Bardo, Tunis,
Tunisia. E-mail: Rabebriahi@yahoo.fr
*** Professor, Higher Institute of Management of Tunis, 41, la Liberté Road, Bouchoucha 2000, Bardo, Tunis,
Tunisia. E-mail: abomri@yahoo.fr

The2013
© Determinants of Earnings
IUP. All Rights Management in Developing Countries:
Reserved. 35
A Study in the Tunisian Context
 Nowadays, interest towards determinants of earnings management has accentuated with
the increasing number of financial scandals that have reduced investors’ trust in
information published on capital market (Fernandez and Garcia, 2007). Indeed, the extent
and causes of earnings management have important implications for regulators, analysts,
academics and practitioners (Beneish, 1999; and Kothari et al., 2005). This allows assessing
earnings quality, facilitates setting new standards and helps the SEC to enforce standards
(Stubben, 2010).

The study of determinants of earnings management in the Tunisian context is interesting

because Tunisia is a developing country with an emerging capital market whose structure is
consistent with international standards. A majority of Tunisian firms are family owned or
controlled. Moreover, bank debt is essential for the survival of Tunisian companies. Tunisia has
undergone several reforms such as the GATT, the creation of a free trade zone with the
European Union, the liberalization of interest rates and exchange rates, the launch of the Guide
for Good Governance Practices of Tunisian Companies (2008)1 and the Guide for Annual Reports
of Tunisian Companies (2009)2. Tunisia has also experienced several accounting reforms. This
was an initiative in the program of international accounting harmonization. In fact, due to
economic changes aimed at establishing a market economy, Tunisia was compelled to introduce
a new accounting system that fulfills the needs of the more diversified financial statement users.
Thus, Tunisian accounting system, which was inspired by the French plan, became a new
accounting system with a conceptual framework inspired from IASC, promoting investors’
interests.

This study aims to identify the factors influencing earnings management in emerging
countries with the example of Tunisia. These factors are grouped into two categories—
incentives and constraints to earnings management. Data of 19 Tunisian listed companies were
collected from the Tunisian stock exchange for the period 2003-2009. Discretionary accruals
was used to estimate the extent of earnings management. The study relies on Dechow et al.
(1995) (modified Jones model), Kothari et al. (2005) and Raman and Shahrur (2008) models.
Subsequently, the residuals of these models are regressed on a set of explanatory variables that
are hypothesized to have impact on earnings management.

The rest of the paper is organized as follows: it presents the research hypotheses developed
on the basis of literature review, and follows it up with a description of the empirical
methodology. Subsequently, it presents the results, and finally, offers the conclusion.

Literature Review and Hypotheses Development

Incentives to Earnings Management
The politico-contractual theory (Watts and Zimmerman, 1986) provides several explanations
to earnings management. The bonus-plan hypothesis supposes that managers apply
accounting policies that enable them to satisfy their interests by shifting the results of future
1
Guide de Bonnes Pratiques de Gouvernance des Entreprises Tunisiennes (2008), Institut arabe des chefs d’entreprise.
2
Guide du Rapport Annuel des Entreprises Tunisiennes (2009), Institut arabe des chefs d’entreprise.

36 The IUP Journal of Corporate Governance, Vol. XII, No. 1, 2013

periods to the current period. The adoption of an executive compensation policy linked to
performance is intended to encourage managers to make decisions in favor of shareholders’
interest. However, many studies show that such a policy does not allow the company to
improve its performance. This is due to managers’ opportunistic behavior. Healy (1985) finds
a positive relationship between earnings management and profit maximization, when the
bonus is between the upper and lower limit. Healy shows also that managers revise earnings
downwards when earnings are less than the lower bound or higher than the upper bound.
However, Gaver et al. (1995) argue that managers revise earnings upward when it is below
the lower limit and they opt for downward revision of earnings when it exceeds the upper
bound.
To ensure common interest between different stakeholders, the company can act on
managerial ownership by adopting a strategy of compensation based on options and equities.
Indeed, Jensen and Meckling (1976) affirm that when the number of shares held by the leader
increases, it encourages acting in the interest of shareholders. Prior studies show that managers
manipulate accounting and financial information when compensation is based on stock options.
In this context, Yermack (1997) finds that managers influence their compensation contracts to
include more options. Consistent with this argument, Bergstresser and Philippon (2006) show
a positive correlation between earnings management and compensation strategy based on
shares and options.
Under the debt-equity hypothesis, managers opt for accounting practices that allow them
to shift profits in future periods to current period by making a high debt to equity ratio (Watts
and Zimmerman, 1986). Moreover, in the most indebted companies, managers try to avoid
the violation of debt clauses by choosing accounting methods that increase earnings of the
current year to the detriment of future years in order to avoid additional costs (refund
obligation, renegotiation costs, etc.). Thus, managers are motivated to manipulate accounting
information when they are close to the limits set by the contract (Watts and Zimmerman,
1986). Thus, the first hypothesis is as follows:
H1: Indebtedness is positively related to earnings management.
Political costs hypothesis states that large firms choose accounting methods that allow
postponing earning disclosure to future periods. Indeed, the larger the firm, the greater the
probability of being subjected to the pressure of the most influential. This encourages managers
to choose accounting methods that reduce earnings in order to reduce political costs
determined on the basis of accounting figures (Cormier et al., 1998).
Jones (1991) studies the relationship between accounting manipulation and firm size in the
US. He shows that in order to receive reimbursement, American managers apply accounting
methods that reduce earnings to show that the company has suffered losses resulting from
unfair competition.
In addition, managers manage earnings in order to comply with laws regulating the sector.
As Han and Wang (1998) show, during the Gulf War, managers of oil companies revised earnings
downward to ensure that the government does not take action in their despite. Managers also

The Determinants of Earnings Management in Developing Countries: 37

A Study in the Tunisian Context
opted for revising earnings downward in order to minimize the amount of tax payable (Erickson
et al., 2004). Hence, the second hypothesis is:
H2: Firm size is negatively related to earnings management.
When evaluating a company, investors rely on accounting information published by
stock markets. Hence, managers are encouraged to manage earnings in order to influence
share prices (Degeorge et al., 1999). They are therefore motivated to reach some thresholds
(Graham et al., 2005), especially when earnings achieved are below some target (Cormier
et al., 2006). These targets can take the value ‘zero’ or use the forecast of analysts
(Degeorge et al., 1999). In fact, as Roychowdhury (2006) notes, whenever the result is close
to zero, managers are motivated to manage earnings in order to prevent losses. Thus, weak
performance motivates managers to manage earnings in order to make the weakness less
visible.
Managers also manage earnings in order to achieve consistent growth. Indeed, fluctuating
earnings negatively influence securities value. For example, DeAngelo et al. (1996) show that
stock prices decline when the company experiences interrupted increasing of earnings. Hence,
they display earnings that equal or exceed those of previous years.
Non-compliance with analysts’ expectations can cause companies to be penalized
(Skinner and Sloan, 2002). Thus, Cheng and Warfield (2005) find that when the company
adopts a strategy of equity-based compensation, managers are motivated to publish
earnings at or above analysts’ forecasts. In fact, stock prices depend largely on achieved
earnings. Hence, managers can manage earnings in order to prevent reducing the firm
value resulting from a decrease in share prices. Therefore, managers seek to align earnings
with market expectations to make positive reactions in the publication of financial
statements.
Some studies focus on the relationship between earnings management and the decision to
sell or buy shares. These studies show that managers manage earnings upward before any act
of issuing shares in order to increase the stock price. Thus, Cheng and Warfield (2005) point
out that managers of firms adopting a strategy of equity-based compensation manage earnings
upward in order to increase stock prices.
Some other researchers argue that the preservation of reputation is also a motivation to
earnings management (Hirshleifer, 1993). Then, some managers manage earnings upward for
fear of being dismissed as result of the poor performance of the firm. Hence, the third
hypothesis is:
H3: Firms with low performance are more intended to manage earnings.

Constraints to Earnings Management

Control mechanism may limit earnings management. We provide the relationship between
earnings management and some control mechanisms, especially the board of director’s
characteristics, managerial ownership, ownership structure and external audit quality.

38 The IUP Journal of Corporate Governance, Vol. XII, No. 1, 2013

Board of Directors’ Characteristics and Earnings Management
Giving the agency theory, Fama (1980) and Fama and Jensen (1983) document that the main
role of the board of directors is to control managers. As Peasnell et al. (2003) suggest, the board
efficiency depends on its structure. This structure includes several characteristics of the board,
including its size and the separation of the manager and the board chair roles.
The board of directors’ efficiency depends on its size. Indeed, expanding the size of the
board of directors may create a conflict between its members because of the difficulty of
communication that may arise when making decisions. In this context, Beasley (1996) and
Yermack (1996) argue that decisions taken by a board of directors of small size are more
effective than those taken by a board of directors of large size. Similarly, Xie et al. (2003) and
Bradbury et al. (2006) show a negative relationship between the size of the board of directors
and discretionary accruals. Hence, the fourth hypothesis is:
H4: The size of the board of directors negatively influences earnings management practice.
Several studies show that separating the roles of manager and board chair is supposed
to strengthen the control exercised by the board of directors. Indeed, to improve the board
of directors’ efficiency and limit earnings management, Cadbury Report (1992) recommends
the separation of the manager and the board chair roles. Thus, Sarkar et al. (2008) note that
the ability to manipulate accounting information increases in the case of cumulation of these
roles. Thus, the fifth hypothesis is:
H5: Earnings management is more important in case of cumulation of manager and board chair
roles.

Managerial Ownership and Earnings Management

Several studies (Klein, 2002; and Peasnell et al., 2005) mention that earnings management
depends on managerial ownership. Indeed, when managers are shareholders in their firms, they
avoid managing earnings in order to avoid the additional tax liability that has a negative impact
on the firm value. Hence, the sixth hypothesis is as follows:
H6: Earnings management is less important when managers are shareholders in their firms.

Ownership Structure and Earnings Management

Prior studies show that a majority of shareholders may limit managers’ opportunism in order
to protect their interests. Beneish (1997) argues that ownership structure helps to ensure
effective control over managers. Similarly, Sarkar et al. (2008) find a negative relationship
between earnings management and the presence of institutional investors holding shares in the
firm. Hence, the seventh hypothesis is as follows:
H7: Earnings management is less important in case of high ownership concentration.
External Audit Quality and Earnings Management
External audit is intended to ensure financial statements’ reliability and sincerity. According to
DeAngelo (1981), audit quality depends on the probability of detecting errors and deficiencies
in financial statements. It also depends on the independence of auditor in order to avoid

The Determinants of Earnings Management in Developing Countries: 39

A Study in the Tunisian Context
influences on his judgments. Defond and Jiambalvo (1991) show a close relationship between
audit quality and reducing errors in financial statements. Further, Becker et al. (1998) note that
the level of discretionary accruals is greater in companies not audited by an auditor belonging
to ‘Big Four’3. Hence, the eighth hypothesis is:
H8: Control by auditors belonging to ‘Big Four’ may limit earnings management.

Dividend Policy
In addition, earnings management takes place due to the desire to protect investors. Thus, a
negative relationship may exist between the dividend policy and earnings management. La Porta
et al. (2000) analyze dividend policy in different institutional contexts. They show that better
shareholder protection is associated with higher dividend. Hence the ninth hypothesis is:
H9: Dividend policy is negatively related to earnings management.

Empirical Methodology
The first step followed in investigating the determinants of earnings management is to
present the model used to measure discretionary accruals. Then, as a second step the data
and its sources are presented. Finally, the research model used to test the hypotheses is
presented.

Measuring Accruals
In empirical literature, a variety of models have been used to measure discretionary accruals,
(see for example, Healy, 1985; DeAngelo, 1986; Dechow and Sloan, 1991; Jones, 1991;
Aharony et al., 1993; Dechow, 1994; Dechow et al., 1995 (modified Jones model); Kothari
et al., 2005; and Raman and Shahrur, 2008). Most of the recently used models are derived
from the Jones (1991) model. Compared to the Healy (1985), DeAngelo (1986), Dechow and
Sloan (1991) and Aharony et al. (1993) models, the original Jones (1991) model takes into
account the effects of changes in a firm’s economic circumstances on non-discretionary
accruals. Some other authors, such as Teoh et al. (1998), Guidry et al. (1999), Peasnell et al.
(2000), and Klein (2002), suggest that the Dechow et al. (1995) (modified Jones model) is more
powerful at detecting sales-based manipulations than the original Jones (1991) model. Recent
models include additional conditioning variables (see for instance, Kothari et al., 2005; and
Raman and Shahrur, 2008 models). In all these models, the discretionary accruals are the
estimated residual obtained from the linear function of change in revenues and gross
property, plant, and equipment of the firm.
This paper uses three models: Dechow et al. (1995) (modified Jones model), Kothari et al.
(2005) and Raman and Shahrur (2008). In fact, to guarantee consistent results, Peasnell et al.
(2000) recommend the use of more than one model in estimating discretionary accruals, since
the quality of models varies according to the nature of earnings management practice and bias
that can affect the estimation.
3
Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.

40 The IUP Journal of Corporate Governance, Vol. XII, No. 1, 2013

Dechow et al. (1995) – Modified Jones Model
The Dechow et al. (1995), modified Jones model, is designed to eliminate the conjectured
tendency of the Jones model to measure discretionary accruals with error when discretion
is exercised over revenue recognition. In the modified model, non-discretionary accruals
are estimated during the event year (i.e., the year in which earnings management is
hypothesized) as:

TAit  1   REVit  ARit    PPE it 

 1    2    3     it
Ait 1 A
 it 1   A it 1   Ait 1 

Kothari et al. (2005) Model

Beneish (1997) criticizes the Jones (1991) model and the Dechow et al. (1995) (modified Jones
model) because they do not include performance indicators. In that case, these models cannot
be used for companies with a non-random performance (Young, 1998). Thus, Barth et al. (2001)
recommend models for estimating discretionary accruals that take into account past and
present economic performance of the company. Kothari et al. (2005) developed a model for
determination of discretionary accruals that reflects this limit. They proposed a model that
relates the accruals to the past and present performance of the firm measured through Return
on Assets (ROA). Kothari et al. (2005) noted the misspecification of the Dechow et al. (1995)
(modified Jones model) for firms with extreme growth and cautioned its use unless the
researcher is confident that credit sales represent accrual manipulation.
The model of Kothari et al. (2005) is as follows:

TAit  1   REVit  ARit    PPE it 

 1   2    3     4 ROAit 1   it
Ait 1 A
 it 1   A it 1   Ait 1 

Raman and Shahrur (2008) Model

McNichols (2002) criticizes all the above-mentioned models because they omit the growth
opportunities of firms. In addition to the ROA included by Kothari et al. (2005), Raman and
Shahrur (2008) propose a model for determination of discretionary accruals that takes into
account the growth opportunities of firms. Raman and Shahrur (2008) propose to use the ratio
of ‘book-to-market’ as a measure of the growth opportunities. The model of Raman and Shahrur
(2008) is as follows:

TAit  1   REVit  ARit    PPE it 

 1   2    3     4 ROAit 1  BTM it   it
Ait 1  Ait 1   Ait 1   Ait 1 

where for sample firm i at time t, TAit represents the total accruals, Ait–1 the total assets,
REVit – ARit the change in cash-basis revenue, PPEit is the gross property, plant, and
equipment, the ROAit–1 is the return on equity ratio, BTMit the book-to-market ratio and it
represents the error term which serves as our proxy for discretionary accruals in
year t. Finally, 1, 2, 3 and 4 are parameters to be estimated.

The Determinants of Earnings Management in Developing Countries: 41

A Study in the Tunisian Context
Data Collection and Variables Definition
The paper considers a sample of 19 Tunisian firms for the period 2003-2009. This sample
consists of firms listed on the Tunisian stock market, from which we exclude firms belonging
to two industries, i.e., banking and insurance, as these sectors use special accounting norms.
The required data were manually collected from annual reports of each company. In Columns 3
and 4 of Table 1, variable definitions and their measures are reported. In Column 2, the
expected signs that hypothesize the relation with discretionary accruals are given. The
explanation of the predicted signs was discussed earlier. Moreover, Table 1 also presents the
measure of each incentive and constraint variable.

Table 1: Definition and Measure of Variables

Expected
Variables Definition Measure
Sign
Incentive Variables
DEBT + Indebtedness of company i at time t Debt-to-equity ratio
SIZE – Size of company i at time t Logarithm of total assets
PERF – Stock market returns of company Variation in stock price of company
i at time t i at time t
Constraint Variables
BOARD – The size of the board administration Logarithm of the number of board
of company i at time t administration members
CUM + Cumulation of the CEO and chairman 1 if the CEO is the chairman of the
of the board functions board, 0 otherwise
MANAG – Managerial ownership Percentage of manager’s ownership
OWN – Majority ownership Percentage of common shares owned
by the top three shareholders
AUDIT – External audit quality 1 if company i is audited at year t by
a ‘Big four’ auditor, 0 otherwise
DIV – Dividend policy Dividend in year t/average stock
price at time t

Research Model
In order to test the hypotheses H1 to H9 proposed earlier in the paper, the following multivariate
regression is estimated:

Dis_Accrualsit = f(DEBT, SIZE, PERF, BOARD, CUM, MANAG, OWN, AUDIT, DIV)

where the dependent (Dis_Accruals) and independent variables are as described in the previous
section.

Dis_Accruals = 0 + 1DEBTit + 2SIZEit + 3PERFit + 4BOARDit + 5CUMit + 6MANAGit

+ 7OWNit + 8AUDITit + 9DIVit + it

42 The IUP Journal of Corporate Governance, Vol. XII, No. 1, 2013

Empirical Results
Descriptive Statistics
Table 2 reports the descriptive statistics of the independent variables. The explicative variables
are divided into two subgroups. The first subgroup includes variables designed to motivate
earnings management and the second subgroup includes variables that are a constraint for
earnings management.
A perusal of the incentive variables of earnings management reveals that the 19 firms are
characterized by a high standard deviation for the DEBT and PERF variables as compared to
the SIZE variable. This means that DEBT and PERF variables are very volatile. Now, the descriptive
statistics of the constraint variables show that the average values of the CUM and AUDIT
variables are 0.821 and 0.297, respectively. These values indicate that the CUM variable has
taken 109 times the value 1 and only 24 times the value 0. On the other hand, the AUDIT
variable has taken 40 times the value 1 and 93 times the value 0. For all the constraint variables,
the descriptive statistics show a low value of standard deviation as compared to the incentive
variables.

Table 2: Descriptive Statistics of Explicative Variables

Variables Obs. Mean SD Min. Max.

Incentive DEBT 133 1.507 5.828 0 52.142

SIZE 133 17.531 1.062 11.684 19.154
PERF 133 2.332 9.215 –20.399 24.763
Constraint BOARD 133 2.232 0.216 1.609 2.484
CUM 133 0.821 0.385 0 1
MANAG 133 0.040 0.100 0 0.441
OWN 133 0.772 0.144 0.357 1
AUDIT 133 0.297 0.459 0 1
DIV 133 0.039 0.030 0 0.106

Multivariate Analysis
Table 3 reports the estimation results of the basic model (Equation 1). Three different models
have been used to estimate the discretionary accruals. The results show that all the three models
are globally significant at 1% level (see the Fischer-statistics in Table 3).
The results show that the variable DEBT has a positive coefficient as expected by theory.
Nevertheless, it is only significant when Raman and Shahrur (2008) model is used at 5% level
of significance. This result is consistent with the first hypothesis suggesting that indebted firms
use earnings management practice in order to avoid the violation of debt clauses. In addition,
Table 3 also shows that the variable SIZE is significant at 1% level in all the models. However,
contrary to our expectation, this relation is positive. This can be explained by market efficiency
and signaling theories which suggest that earnings management can be used from an

The Determinants of Earnings Management in Developing Countries: 43

A Study in the Tunisian Context
 Table 3: Multivariate Analysis Results

Dechow et al. (1995) – Kothari et al. (2005) Raman and Shahrur

Expected Modified Jones Model Model (2008) Model
Variables
Signs
Coef. t-Stat. Coef. t-Stat. Coef. t-Stat.
Intercept –1.107 –4.282*** –0.798 –4.282*** –0.802 –3.476***
DEBT + 0.0922 1.276 0.03 1.277 0.081 2.253**
SIZE – 0.0636 3.773*** 0.0477 3.774*** 0.052 3.446***
PERF – –0.0586 –1.749* –0.064 –1.749* –0.066 –1.698*
BOARD – –0.0204 –0.447 –0.019 -0.447 –0.036 –0.816
CUM + –0.0511 –1.716* –0.032 –1.723* –0.029 –1.282
MANAG – 0.126 2.745** 0.06 2.745** 0.101 2.424**
OWN – –0.003 0.125 0.0045 0.125 –0.025 –0.536
AUDIT – –0.011 –1.212 –0.024 –1.212 –0.018 –0.858
DIV – 0.8433 1.083 0.376 1.084 –0.749 –2.468**
Adjusted R 2
0.876 0.539 0.296
F-Statistic 0.0000 0.0000 0.0011
Number of Obs. 133 133 133
Note: *, ** and *** indicate significance at 10%, 5% and 1% levels respectively.

informative perspective. Thus, earnings management is considered by managers as a means to

signal to investors their expectations about future opportunities (Healy and Palepu, 1995).
Looking at the variable PERF, it is found that it has a significant impact on discretionary accruals
at 10% level in all the models. As expected, the effect of this variable on discretionary accruals
is negative. This means that the third hypothesis is also accepted.

Surprisingly, the variable BOARD is not found to be significant for any of the models
measuring discretionary accruals, suggesting that the board size does not influence earnings
management practice. This finding can be explained by the fact that a majority of Tunisian firms
are family owned or controlled. This is consistent with the findings of Omri (2001), which show
that managerial ownership can limit the role of the board in controlling managers.

The variable CUM is significant at 10% level with Dechow et al. (1995) (modified Jones model)
and Kothari et al. (2005) model. According to the results, this relation is negative. This
contradicts the hypothesis that cumulation of managerial and board chair roles positively
influences earnings management.

Moreover, empirical results show that the variable MANAG is significant at 5% level in all
models used to estimate discretionary accruals. However, contrary to our expectations, MANAG
is positively related to discretionary accruals. Contrary to agency theory and convergence-of-
interest hypothesis and consistent with entrenchment hypothesis, this finding suggests that

44 The IUP Journal of Corporate Governance, Vol. XII, No. 1, 2013

managerial ownership positively influences earnings management practice. Thus, as Jensen
(1986) and Klassen (1997) note, when there is less separation between owners and managers,
managers have less pressure from financial markets to disclose firm value and pay less attention
to short-term financial reports. This is consistent with the findings of Sanchez-Ballesta and
Garcia-Meca (2007), which show that the lack of market discipline can lead to managerial
practices that are aligned with personal motives.
It is also found that both the variables OWN and AUDIT are not significant. This means that
firstly, ownership structure does not influence earnings management practice. This can be due
to the specificities of the studied context. Indeed, in Tunisian firms, shareholding structure is
largely family controlled. Secondly, the finding reveals that earnings management practice is not
related to external audit quality. This can be explained by the fact that in the Tunisian context,
the auditor may incur a low legal risk while detecting anomalies in financial disclosure.
Moreover, in the Tunisian context, mandatory rotation is likely to be a priority for auditors.
Hence, a friendly relationship generally develops between the managers and auditors who can
be a source of managers’ entrenchment. Thus, Deis and Giroux (1992) note that audit quality
decreases when auditor’s tenure increases. This leads to reduction in auditor’s independence
and makes the influence of external audit less significant.
Finally, the results show that DIV has a significant influence on discretionary accruals at 5%
level with Raman and Shahrur (2008) model. As hypothesized, this relation is negative,
suggesting that dividend policy is seen as a means to control managers’ opportunism.

Conclusion
This paper investigated the determinants of earnings management in the Tunisian context.
Several factors supposed to have a significant impact on the earnings management have
been tested on the basis of accounting theories. These factors have been mainly divided
into two principal groups—incentive group and constraint group. In addition, three models
that estimate discretionary accruals (dependent variable) have been considered. Empirical
analysis reveals that the results depend on the model used to estimate discretionary
accruals. In all, six of the nine variables considered are found to significantly determine
earnings management, while only three of the six determinants are simultaneously
significant in the three models considered in the study. The DEBT and DIV variables are only
significant for Raman and Shahrur (2008) model, while the CUM variable is significant for
the other two models. In addition, empirical results show that three out of the six
determinants do not have a sign as expected. These variables are SIZE, CUM and MANAG
variables. This contradiction to agency theory is an interesting result because it identifies
some specific characteristics of developing countries, especially in the Tunisian context
(Tunisian firms are family owned or controlled) as compared to the existing literature.
Indeed, the findings show that some control mechanisms such as the board size, the
external audit quality and the ownership structure are inefficient in the studied context.
This suggests that these mechanisms are operated in order to facilitate managers’
entrenchment strategy. 

The Determinants of Earnings Management in Developing Countries: 45

A Study in the Tunisian Context
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The Determinants of Earnings Management in Developing Countries: 49

A Study in the Tunisian Context
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