Accrual Management in the Pakistani Non-Financial Firms: Explaining the Role of Idiosyncratic Risk and Macroeconomic Uncertainty

Abstract

The growing global uncertainty has pushed firms to re-assess their financial strengths, and re-examine their earning management strategies and methods. It is now common knowledge that firms face unexpected variations in several different, firm-specific, and macroeconomic factors at a time. Therefore, this research sets out to examine the role of both idiosyncratic (firm-specific) risk and macroeconomic uncertainty in earnings (discretionary accrual) management, of 400 non-financial listed firms, over the time period spanning from the year 2000-2016. In this regard, this study offers robust empirical evidence that is based on the importance of both idiosyncratic and macroeconomic uncertainties, by considering various indicators of each type of uncertainty that is taken into account. The empirical findings state that there is a negative impact of both types of uncertainties on discretionary accruals. Notably, the findings reveal that compared to the impact of idiosyncratic risk, the uncertainty associated with macroeconomic factors tends to have greater impacts on accrual management of the Pakistani firms. These findings about the earning management effects of uncertainty are useful for different stakeholders including policymakers, customers, suppliers, investors and firm managers in order to formulate appropriate strategies and device relevant policies.