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Investigating the Effect of the Income Smoothing Practice on the Ability to Predict Financial Failure: An Analytical Study of a Sample of Banks Listed on the Iraq Stock Exchange
American Journal of Economics and Business Management,
Vol. 6 No. 9 (2023): American Journal of Economics and Business Management
Abstract
This research aims to determine the effect of measuring income smoothing on the ability to predict the financial failure of banks listed in the Iraq Stock Exchange. The research sample consisted of ten private local commercial banks registered in the Iraq Stock Exchange for the fiscal period from 2016 to 2021. This study used the (Miller, 2009) model to measure smoothing income as an independent variable and the (Z-Sherrod, 1987) model to measure the dependent variable predicting financial failure.
A set of statistical tools and methods, such as arithmetical averages and regression analysis, were utilized with the help of a set of statistical programs (SPSS and Microsoft Excel) to analyze the dataset. The study resulted in a set of purposeful conclusions and recommendations, the most important of which is a positive relationship between the measurement of income smoothing and the ability to predict financial failure.
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- Abiola, O. M. 2022. Audit Quality and Earnings Management Practices among Manufacturing Companies in Nigeria (Doctoral dissertation, Kwara State University (Nigeria).
- Al-Amiri, Saud Jaid Mashkour; Jabr, Abdul-Jabbar Alwan, 2018. Amended accounting data and its impact on early detection of corporate financial failure, Al-Ghari Journal of Economic and Administrative Sciences, Vol. 15, No. 1, PP. 324-358
- Al-Janabi, Haider Abbas, 2018. Predicting the financial failure of commercial banks using the Sherrord model, applied research on a sample of banks listed on the Iraq Stock Exchange for the period (2011-2016). Administration and Economics Journal, Vol. 7, No. 28, PP 61-83
- Al-Moussawi, Haider Younes; Abdullah, Haider Abbas, 2013. The ability of investors in the stock market to predict the financial failure of companies and its impact on the financial performance indicators of the market (an applied study on a sample of companies listed on the Iraq Stock Exchange for the period from 2005-2007). Iraqi Journal of Administrative Sciences, Vol. 9, No. 38, pp. 216-240
- Alsunaidi, Mustafa Mohammed Jasim, 2021. The relationship between accounting conservatism and financial failure-an applied study for Jordanian industrial public shareholding companies, Journal of Economic Sciences, Vol. 16, No. 60, PP. 204-233
- Ashari, N., Koh, H. C., Tan, S. L., & Wong, W. H. 1994. Factors affecting income smoothing among listed companies in Singapore. Accounting and business research, 24(96), 291-301.
- Beatty, A., & Harris, D. G. 2001. Intra-group, interstate strategic income management for tax, financial reporting, and regulatory purposes. The Accounting Review, 76(4), 515-536.
- Bowen, R. M., DuCharme, L., & Shores, D. 1995. Stakeholders' implicit claims and accounting method choice. Journal of accounting and economics, 20(3), 255-295.
- Carlson, S. J., & Bathala, C. T. 1997. Ownership differences and firms' income smoothing behavior. Journal of Business Finance & Accounting, 24(2), 179-196.
- Copeland, R. M. 1968. Income smoothing. Journal of Accounting Research, 6, 101-116.
- DeFond, M. L., & Park, C. W. 1997. Smoothing income in anticipation of future earnings. Journal of accounting and economics, 23(2), 115-139.
- Dopuch, N., & Pincus, M. 1988. Evidence on the choice of inventory accounting methods: LIFO versus FIFO. Journal of Accounting Research, 28-59.
- Dutzi, A., & Rausch, B. 2016. Earnings management before bankruptcy: A review of the literature. Journal of Accounting and Auditing: Research & Practice, 2016(2016), 1-21.
- Godfrey, J., Mather, P., & Ramsay, A. 2003. Earnings and impression management in financial reports: the case of CEO changes. Abacus, 39(1), 95-123.
- Gordon, M. J. 1971. Towards a theory of financial distress. The journal of finance, 26(2), 347-356.
- Habeb, Nada Salman; Mohammed, Sana'a, Jasim Mohammed; Baha'a-Aldeen, Maryam, 2023. Analysis of earnings management practices for agricultural sector companies in Iraq according to the Miller model, an applied study for the period 2015-2017. Journal of Administration and Economics, Vol. (special issue). PP 140-150
- HAW, I. M., Qi, D., Wu, D., & Wu, W. 2005. Market consequences of earnings management in response to security regulations in China. Contemporary Accounting Research, 22(1), 95-140.
- Healy, P. M. 1985. The effect of bonus schemes on accounting decisions. Journal of accounting and economics, 7(1-3), 85-107.
- Herrmann, D., & Inoue, T. 1996. Income smoothing and incentives by operating condition: An empirical test using depreciation changes in Japan. Journal of International Accounting, Auditing and Taxation, 5(2), 161-177.
- Juma, Abdul Rahman Obaid; Khalef, Athraa Khalil, 2021. The role of credit policy components in reducing financial crises in the Iraqi banking sector (Dijla and phrates bank as a model), Tikrit Journal of Administration and Economics Sciences, Vol. 17, No. 56, part 4, PP. 301-315
- Krull, L. K. 2004. Permanently reinvested foreign earnings, taxes, and earnings management. The Accounting Review, 79(3), 745-767.
- Liu, L. X., Liu, S., & Sathye, M. 2021. Predicting bank failures: a synthesis of literature and directions for future research. Journal of Risk and Financial Management, 14(10), 474.
- Miller, J. E. 2009. The Miller ratio (MR): A tool for practitioners and regulators to detect for the possibility of earnings management (EM). Journal of Applied Business Research (JABR), 25(1).
- Mohammed, Eman Reda; Mohammed, Raed Majeed Abd, 2022. The use of Some modern managerial accounting methods and models of financial failure and their impact on the continuity of Economic units. Journal of Madenat Alelem College. Vol. 14. No.1. PP 8-29
- Mohammed, Moayad Abd, 2019. The impact of financial failure on the investment forms of in the Islamic Banks, Journal of Management and Economics, Vol. 8, No. 30, PP. 135-155
- Moses, O. D. 1987. Income smoothing and incentives: Empirical tests using accounting changes. Accounting Review, 358-377.
- Murphy, K. J., & Zimmerman, J. L. 1993. Financial performance surrounding CEO turnover. Journal of Accounting and Economics, 16(1-3), 273-315.
- Obeidat, M. I. S. 2021. Relationship between firm size and profitability with income smoothing: Evidence from food and beverages (F&B) firms in Jordan. The Journal of Asian Finance, Economics and Business, 8(6), 789-796.
- Sabry, Thamer Mahdi Muhammad, 2018. The importance of using examples of knowing beforehand the financial failure to evaluate the capacity of companies to continue or fail financially, The Administration & Economic College Journal For Economics & Administration & Financial Studies, Vol 10, No.3, PP. 382-395
- Saputra, A., & Agustin, E. W. 2022. Analysis Of Financial Factors, Institutional Ownership, And Tax Avoidance On Income Smoothing. Asia Pacific Journal of Business Economics and Technology, 2(01), 86-103.
- Shahad Salah Al-Khalili, T. A. K. 2022. Predicting Industrial Companies Financial Failure Using Sherrod And Zmijewski Models–Analytical Study. Journal of Southwest Jiaotong University, 57(4).
- Shani, Murtadha Mohammed, 2020. Predicting financial failure through some elements of the financial statements Applied research in some economic units in the private sector, Tikrit Journal of Administrative and Economic Sciences, Vol. 16, No. 50, Part 1, PP. 163-175
- Skinner, D. J., & Sloan, R. G. 2002. Earnings surprises, growth expectations, and stock returns or don't let an earnings torpedo sink your portfolio. Review of accounting studies, 7(2-3), 289-312.
- Sweeney, A. P. 1994. Debt-covenant violations and managers' accounting responses. Journal of accounting and Economics, 17(3), 281-308.
- Wells, P. 2002. Earnings management surrounding CEO changes. Accounting & Finance, 42(2), 169-193.
References
Abiola, O. M. 2022. Audit Quality and Earnings Management Practices among Manufacturing Companies in Nigeria (Doctoral dissertation, Kwara State University (Nigeria).
Al-Amiri, Saud Jaid Mashkour; Jabr, Abdul-Jabbar Alwan, 2018. Amended accounting data and its impact on early detection of corporate financial failure, Al-Ghari Journal of Economic and Administrative Sciences, Vol. 15, No. 1, PP. 324-358
Al-Janabi, Haider Abbas, 2018. Predicting the financial failure of commercial banks using the Sherrord model, applied research on a sample of banks listed on the Iraq Stock Exchange for the period (2011-2016). Administration and Economics Journal, Vol. 7, No. 28, PP 61-83
Al-Moussawi, Haider Younes; Abdullah, Haider Abbas, 2013. The ability of investors in the stock market to predict the financial failure of companies and its impact on the financial performance indicators of the market (an applied study on a sample of companies listed on the Iraq Stock Exchange for the period from 2005-2007). Iraqi Journal of Administrative Sciences, Vol. 9, No. 38, pp. 216-240
Alsunaidi, Mustafa Mohammed Jasim, 2021. The relationship between accounting conservatism and financial failure-an applied study for Jordanian industrial public shareholding companies, Journal of Economic Sciences, Vol. 16, No. 60, PP. 204-233
Ashari, N., Koh, H. C., Tan, S. L., & Wong, W. H. 1994. Factors affecting income smoothing among listed companies in Singapore. Accounting and business research, 24(96), 291-301.
Beatty, A., & Harris, D. G. 2001. Intra-group, interstate strategic income management for tax, financial reporting, and regulatory purposes. The Accounting Review, 76(4), 515-536.
Bowen, R. M., DuCharme, L., & Shores, D. 1995. Stakeholders' implicit claims and accounting method choice. Journal of accounting and economics, 20(3), 255-295.
Carlson, S. J., & Bathala, C. T. 1997. Ownership differences and firms' income smoothing behavior. Journal of Business Finance & Accounting, 24(2), 179-196.
Copeland, R. M. 1968. Income smoothing. Journal of Accounting Research, 6, 101-116.
DeFond, M. L., & Park, C. W. 1997. Smoothing income in anticipation of future earnings. Journal of accounting and economics, 23(2), 115-139.
Dopuch, N., & Pincus, M. 1988. Evidence on the choice of inventory accounting methods: LIFO versus FIFO. Journal of Accounting Research, 28-59.
Dutzi, A., & Rausch, B. 2016. Earnings management before bankruptcy: A review of the literature. Journal of Accounting and Auditing: Research & Practice, 2016(2016), 1-21.
Godfrey, J., Mather, P., & Ramsay, A. 2003. Earnings and impression management in financial reports: the case of CEO changes. Abacus, 39(1), 95-123.
Gordon, M. J. 1971. Towards a theory of financial distress. The journal of finance, 26(2), 347-356.
Habeb, Nada Salman; Mohammed, Sana'a, Jasim Mohammed; Baha'a-Aldeen, Maryam, 2023. Analysis of earnings management practices for agricultural sector companies in Iraq according to the Miller model, an applied study for the period 2015-2017. Journal of Administration and Economics, Vol. (special issue). PP 140-150
HAW, I. M., Qi, D., Wu, D., & Wu, W. 2005. Market consequences of earnings management in response to security regulations in China. Contemporary Accounting Research, 22(1), 95-140.
Healy, P. M. 1985. The effect of bonus schemes on accounting decisions. Journal of accounting and economics, 7(1-3), 85-107.
Herrmann, D., & Inoue, T. 1996. Income smoothing and incentives by operating condition: An empirical test using depreciation changes in Japan. Journal of International Accounting, Auditing and Taxation, 5(2), 161-177.
Juma, Abdul Rahman Obaid; Khalef, Athraa Khalil, 2021. The role of credit policy components in reducing financial crises in the Iraqi banking sector (Dijla and phrates bank as a model), Tikrit Journal of Administration and Economics Sciences, Vol. 17, No. 56, part 4, PP. 301-315
Krull, L. K. 2004. Permanently reinvested foreign earnings, taxes, and earnings management. The Accounting Review, 79(3), 745-767.
Liu, L. X., Liu, S., & Sathye, M. 2021. Predicting bank failures: a synthesis of literature and directions for future research. Journal of Risk and Financial Management, 14(10), 474.
Miller, J. E. 2009. The Miller ratio (MR): A tool for practitioners and regulators to detect for the possibility of earnings management (EM). Journal of Applied Business Research (JABR), 25(1).
Mohammed, Eman Reda; Mohammed, Raed Majeed Abd, 2022. The use of Some modern managerial accounting methods and models of financial failure and their impact on the continuity of Economic units. Journal of Madenat Alelem College. Vol. 14. No.1. PP 8-29
Mohammed, Moayad Abd, 2019. The impact of financial failure on the investment forms of in the Islamic Banks, Journal of Management and Economics, Vol. 8, No. 30, PP. 135-155
Moses, O. D. 1987. Income smoothing and incentives: Empirical tests using accounting changes. Accounting Review, 358-377.
Murphy, K. J., & Zimmerman, J. L. 1993. Financial performance surrounding CEO turnover. Journal of Accounting and Economics, 16(1-3), 273-315.
Obeidat, M. I. S. 2021. Relationship between firm size and profitability with income smoothing: Evidence from food and beverages (F&B) firms in Jordan. The Journal of Asian Finance, Economics and Business, 8(6), 789-796.
Sabry, Thamer Mahdi Muhammad, 2018. The importance of using examples of knowing beforehand the financial failure to evaluate the capacity of companies to continue or fail financially, The Administration & Economic College Journal For Economics & Administration & Financial Studies, Vol 10, No.3, PP. 382-395
Saputra, A., & Agustin, E. W. 2022. Analysis Of Financial Factors, Institutional Ownership, And Tax Avoidance On Income Smoothing. Asia Pacific Journal of Business Economics and Technology, 2(01), 86-103.
Shahad Salah Al-Khalili, T. A. K. 2022. Predicting Industrial Companies Financial Failure Using Sherrod And Zmijewski Models–Analytical Study. Journal of Southwest Jiaotong University, 57(4).
Shani, Murtadha Mohammed, 2020. Predicting financial failure through some elements of the financial statements Applied research in some economic units in the private sector, Tikrit Journal of Administrative and Economic Sciences, Vol. 16, No. 50, Part 1, PP. 163-175
Skinner, D. J., & Sloan, R. G. 2002. Earnings surprises, growth expectations, and stock returns or don't let an earnings torpedo sink your portfolio. Review of accounting studies, 7(2-3), 289-312.
Sweeney, A. P. 1994. Debt-covenant violations and managers' accounting responses. Journal of accounting and Economics, 17(3), 281-308.
Wells, P. 2002. Earnings management surrounding CEO changes. Accounting & Finance, 42(2), 169-193.