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Earnings management and privatisations: Evidence from Pakistan

Iqbal, Abdullah, Khan, Iram A., Ahmad, Zeeshan (2009) Earnings management and privatisations: Evidence from Pakistan. In: The Asian Finance Association 2009 International Conference, 30 Jun - 3 Jul 2009, Brisbane, Australia. (Submitted) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided) (KAR id:64805)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided.


Purpose: This paper examines the incidence of earnings management around privatizations of State Owned Enterprises (SOEs) in Pakistan. The privatization program in Pakistan was initiated in 1985, albeit without any specified objectives. It was not until 1991 when Privatization Commission was established and the privatization program continued with a rather clearer agenda. The paper argues that, depending on the circumstances, SOEs could face both upward (such as maximizing privatization proceeds) and downward (such as to gain political favors from investors) earnings management incentives.

Research Methodology/Design: Prior research shows that firms making initial public offering or seasoned equity offerings use income increasing measures (such as accruals) to inflate the reported (quarterly or yearly) earnings to improve the market value of the firm prior to such offerings. This study uses the most commonly used modified Jones model to estimate and disintegrate total accruals into discretionary and non-discretionary current and long term accruals to detect the incidence of earnings management during the two years before to two years after the privatization.

Findings: Using a sample of 33 privatizations from a total of 158, conducted during the period 1991-2005, the study shows that SOEs use both short term (current) and long term accruals to inflate reported earnings. The results also show that these accruals reverse in the post-privatization years. Overall, we cannot reject the incidence of earnings management around privatization years.

Practical implications: Investors should carefully evaluate the firms being privatized keeping in view the possibilities of earnings management by SOEs and not be deceived by the improving earnings figures around privatization. Regulatory and accounting authorities could tighten the privatization and accounting regulations to minimize the incidence of intentional earnings management.

Originality/Value: This is the first study that examines the performance of privatization of SOEs in Pakistan in the context of earning management. In addition, to the best of the authors’ knowledge, this is the first that applies the modified Jones model to Pakistani firms.

Research limitations: These results should be interpreted with caution due to a relatively smaller sample size as compared to that of the total number of privatizations.

Item Type: Conference or workshop item (Paper)
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
H Social Sciences > HG Finance
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Funders: University of Kent (
Depositing User: Abdullah Iqbal
Date Deposited: 28 Nov 2017 10:29 UTC
Last Modified: 20 May 2023 19:02 UTC
Resource URI: (The current URI for this page, for reference purposes)

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