Paper
Journal of Derivatives & Hedge Funds (2008) 14, 251–264. doi:10.1057/jdhf.2008.23
Evaluating the specification and power of discretionary accruals models in Kuwait
Practical Applications This study examines specification and power of four models to detect management tendency to manipulate accounting accruals to manage earnings according to their short-term incentives. All four models have the power to detect earnings management. The findings have implications for analysts, financial institutions, auditors, and regulators. For example, in certain contexts, such as initial public offerings, management tends to maximise earnings to increase shares prices. The examined models can be used to detect whether accruals have been manipulated to manage earnings.
Eiman Algharaballi1 and Saad Albuloushi2
Correspondence: , P.O. Box 936, Surrah 45710, Kuwait. Tel: +965 5315536
1Eiman Algharaballi is a licensed public accountant, accredited professional accountant and holds a master's degree from Murray State University (Kentucky USA). Mrs Algharaballi is a faculty member at the College of Business Studies, PAAET.
2Saad Albuloushi is a licensed public accountant and is currently the Chairman of the Accounting Department at the College of Business studies, PAAET. Professor Albuloushi received his PhD degree from Kent State University (OH, USA) in 2000. His research has been concentrated on capital markets.
Received 1 July 2008; Revised 1 July 2008.
Abstract
Management of firms tend to focus on short-term personal incentives as opposed to the long-term success of their firms. Accounting accruals represent a favoured instrument for manipulation of earnings and therefore maximising incentives. We evaluate four models developed in prior research to detect earnings management in Kuwaiti listed firms; Jones model, modified Jones model, extended Jones cash flow model, and working capital accruals model. Consistent with the results found in previous studies, we show that all four models were well specified when applied to random samples of firms listed in Kuwait Stock Exchange. In the detection of earnings management, all models show almost the same power capability when expense manipulation was exercised. Jones model, however, shows the highest power of detecting the income-increasing accruals through the manipulation of revenue.
Keywords:
earnings management, discretional accrual, foreign financial market, Kuwait Stock Exchange, Jones model
