The Ability of Current Earnings to Predict Future Cash Flows in Light of Earnings Management Phenomenon: An Empirical Study on Industrial and Service Corporations Listed in Amman Stock Exchange

Abstract

This study mainly aimed to address the ability of current earnings to predict future operating cash flows in light of earnings management (EM) phenomenon in Jordanian industrial and service corporations listed in Amman Stock Exchange during the period (2010 – 2015). In order to achieve the objectives of this study, the financial data of a sample of 103 industrial and service companies was tested. The sample consisted of (59) industrial corporations representing (78%) of the overall industrial sector and (44) service corporations representing (72%) of the overall service sector. The study relied on the absolute value of discretionary accruals as an indicator of earnings management, which has been measured by modified Jones model. After testing the hypotheses of the study statistically, the results proved the presence of statistically significant indicators of the practice of earnings management by industrial and service corporations, with roughly equal proportions. The study also found a negative correlation between earnings management (represented by discretionary accruals) and the ability of current earnings to predict future operating cash flows for industrial and service corporations. The most important recommendation of the study was to develop the existing governmental instructions to control and limit the earnings management because of their negative impact on many financial and economic aspects, including the quality of current earnings and their ability to predict future cash flows