The Impact of CEO Power on the Relationship between Corporate Financial Distress and Earnings Management: Evidence from Egypt

Elhabashy, Hanaa Abdelkader; سعد, ناهد سعد احمد سيد

doi:10.21608/sjsc.2024.272223.1427

The Impact of CEO Power on the Relationship between Corporate Financial Distress and Earnings Management: Evidence from Egypt

نوع المستند : المقالة الأصلية

المؤلفون

¹ کلية التجارة جامعة المنوفية

² شعبة إدارة الأعمال _الاكاديمية الدولية للهندسة وعلوم الاعلام

10.21608/sjsc.2024.272223.1427

المستخلص

This study examines the impact of corporate financial distress on earnings management behavior and how CEO power moderates this relationship. The sample includes 45 non-financial EGX-100 firms from 2017 to 2022, with 270 balanced observations. The study utilized three proxies for earnings management: accruals-based earnings management based on the Modified Jones Model, real earnings management based on Roychowdhury (2006), and earnings manipulation using Beneish M-Score. The Altman (1968) model is used to estimate financial distress. Following Finkelstein (1992), this study used three resources of CEO power: structural power, ownership power, and expert power. Panel data were analyzed using the Feasible Generalized Least Squares (FGLS) method and logistic random-effects model.

Results indicate that financially distressed firms engage more in accrual earnings management and earnings manipulation but less in real earnings management. Results also show that CEO structural power negatively impacts accrual earnings management and earnings manipulation. However, CEO ownership power increases real earnings management and decreases accrual earnings management and earnings manipulation (M-score). Results also show a negative association between CEO expert power and real earnings management. Results indicate that CEO power moderates the relationship between corporate financial distress and earnings management behavior by restraining earnings management proxies. Powerful CEOs reduce their participation in earnings management activities during corporate financial distress.

The study offers further insights into earnings management and CEO power in financially distressed firms, especially focusing on an emerging economy. Its findings are important to academics, managers, investors, bankers, rating agencies, and distressed institution owners.

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