ISSN: 2225-8329
Open access
This study examined the relationship between Shariah-compliant firms' market performance with earnings management, free cash flow and industry. In this analysis, data from 2009 to 2011 were used to assess the post-financial crisis impact in 2008 before the 2012 Malaysian Code on Corporate Governance was adopted. This research duplicated the method used by Roychowdhury to assess the companies that are accused of engaging in the selling of products at an inflated price and that have excessive discretionary spending which is the proxy for earnings management. Free cash flow was calculated by deducting capital expenditure from cash flow operations. Although, industry was denoted as number 1 to 9 based on the Bursa Malaysia (BM) type of industry. Linear regression was used to assess the effect of earnings management, free cash flow and industry on the output of shariah-compliant companies in Malaysia. The results showed that Shariah-compliant companies have been able to improve their performance through free cash flow and earnings management practices. Free cash flow was found to increase linearly with firm performance which contradicts the previous result. The type of industry in which a firm operates often plays an important role in the success of the business. This research, however, could not classify the industry that outperforms other industries as the mean comparison was negligible. Such results provided no clear proof that sharia-compliant companies would comply with Shariah laws to prevent 'gharar' (uncertainties) in business practices.
1. Altamuro, J., Beatty, A. L., and Weber, J. (2005). The Effects of Accelerated Revenue Recognition on Earnings Management and Earnings Informativeness: Evidence from SEC Staff Accounting Bulletin No. 101. The Accounting Review, 80, pp. 373-401.
2. Beatty, R. P. (1989). Auditor Reputation and the Pricing of Initial Public Offerings. The Accounting Review, 64(4), pp.693-709.
3. Bhojraj, S., Hribar, P., and Picconi, J. M. (2009). Making Sense of Cents: An Examination of Firms that Marginally Miss or Beat Analyst Forecasts. The Journal of Finance, 64, pp. 2361-2388.
4. Brush, T. H., Bromiley, P., and Hendrickx, M. (2000). The Free Cash Flow Hypothesis for Sales Growth and Firm Performance. Strategic Management Journal, 21(4), pp. 455-472.
5. Chen, M. C., & Tzeng, Z. C. (2011). The Effect of Leverage on Firm Value and How the Firm Financial Quality Influence on this Effect. World Journal of Management, 3, pp.30-53.
6. Cohen, D. A., and Zarowin, P. (2010). Accrual Based and Real Earnings Management Activities Around Seasoned Equity Offerings. Journal of Accounting and Economics, 50, pp. 2-19.
7. DeFond, M. L., and Park, C. W. (1997). Smoothing Income in Anticipation of Future Earnings. Journal of Accounting and Economics, 23, pp. 115-139.
8. Dye, R. (1988). Earnings Management in Overlapping Generations Model. Journal of Accounting Research, 26, pp.195-235.
9. Eisenhardt, K. M. (1989). Agency Theory: An Assessment and Review. The Academy of Management Review, 14(1), pp. 57-74.
10. Graham, J. R., Harvey, C. R., & Rajgopal, S. (2004). The Economic Implications of Corporate Financial Reporting. Journal of Accounting and Economics, 40(1), pp. 3-73.
11. Gunny, K. (2005). What Are the Consequences of Real Earnings Management. Journal of Corporate Finance, PhD Dissertation, University of California, Berkeley.
12. Healy, P. M., & Wahlen, J. M. (1999). A Review of the Earnings Management Literature and Its Implications for Standard Setting. Accounting Horizon, 13 (4), pp. 365-383.
13. http://www.investopedia.com
14. http:// www.sc.com
15. Jelinek, K. (2007). The Effect of Leverage Increases on Earnings Management. Journal of Business and economic Studies, 13(2), pp. 24-46.
16. Jensen, M. C., and Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3, pp. 305-360.
17. Suffian, M. T. M. (2013). The Relationship between Real Earnings Management and Firm’s Value of Public Listed Companies in Malaysia. (Unpublished master’s thesis). MARA University of Technology (UiTM), Shah Alam, Selangor, Malaysia.
18. Qing, Y., and Gan, S. (2007). The Empirical Research of Correlation between Free Cash Flow. Business Accounting, 21, pp. 21.
19. Rayan, K. (2008). Financial Leverage and Firm Value. Degree of Master of Business Administration, University of Pretoria. Retrieved from http://upetd.up.ac.za
20. Richardson, V. J. (2000). Information Asymmetry and Earnings Management: Some Evidence. Review of Quantitative Finance and Accounting, 15, pp. 325-347.
21. Richardson, S. (2006). Over-investment of Free Cash Flow. Rev Acc Stud, 11, pp. 159-189.
22. Roychowdhury, S. (2006). Earnings Management through Real Activities Manipulation. Journal of Accounting and Economics, 42, pp. 335-370.
23. Sadeghi, M. (2008). Financial Performance of Shariah-Compliant Investment: Evidence from Malaysian Stock Market. International Research Journal of Finance and Economics, 20, pp. 15-26.
24. Subramanyam, K. R. (1996). The Pricing of Discretionary Accruals. Journal of Accounting and Economics, 22(1), pp. 249-281.
25. Trueman, B., and Titman, S. (1988). An Explanation for Accounting Income Smoothing. Journal of Accounting Research, 26(Supplement), pp.127-139.
26. Vincent, D., and Collins, K. (2010). The Kings of Cash Flow Investing in Tomorrow’s Potential Winners Today. Advisor Perspectives, Inc. at www.advisorperspectives.com.
27. Yusarina, M. I., Zuraidah, M. S., Mohd, T
To cite this article: Mohd Suffian, M. T., Osman, A. H., Mohd Sanusi, Z., Ridzuan, A. R. (2020). The Effects of Earnings Management, Free Cash Flow and Industry on Firm Performance: Empirical Evidence from Shariah-Compliant Companies in Malaysia, International Journal of Academic Research in Accounting, Finance and Management Sciences 10 (1): 367-377.
Copyright: © 2020 The Author(s)
Published by Human Resource Management Academic Research Society (www.hrmars.com)
This article is published under the Creative Commons Attribution (CC BY 4.0) license. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this license may be seen at: http://creativecommons.org/licences/by/4.0/legalcode