Artificial and real income smoothing around corporate governance reforms: further evidence from Egypt

Purpose The authors examine whether managers switch from artificial income smoothing using discretionary accruals to real income smoothing around corporate governance reform in Egypt. Design/methodology/approach The sample comprises 61 non-financial companies listed on the Egyptian Stock Exchange for the years 2004-2011. The authors use discretionary accruals as a proxy for artificial income smoothing and income/loss from asset sales as a proxy for real income smoothing. Findings The authors offer a significant contribution to accounting literature by providing new empirical evidence on the trade-off between real smoothing technique (e.g. income/loss from asset sales) and discretionary accruals around governance reform in a developing country. Research limitations/implications This study suffers from some limitations. First, the study sample is limited to only 338 observations. However, this is due to collecting the data manually and to the small number of listed firms during the study period. Second, the study period ended in 2011 due to the unprecedented political instability after the 2011 Egyptian people revolution. Third, although this study examines the effect of corporate governance, not all the governance aspects have been examined in the study models due to the lack of data. Practical implications First, the results of the total samples reveal that managers prefer real income smoothing than accruals income smoothing. This result may confirm the literature arguments on the advantages of REM methods over AEM methods. Cohenet al.(2008) find that firms switch to manage earnings using REM methods and explain that REM methods are harder to detect because they depend on operating decisions (Schipper, 1989). REM can be undertaken anytime during the year (Gunny, 2010). Besides, REM could not be deemed a violation of accounting standards or regulations (MyVay, 2006). Originality/value The authors offer a significant contribution to accounting literature by providing new empirical evidence on the trade-off between real smoothing technique (e.g. income/loss from asset sales) and discretionary accruals around governance reform in a developing country.