Accruals earnings management and cash holdings in Saudi Arabia: an empirical study

Purpose This research aims to examine the effects of accruals earnings management (AEM) practices on the cash holdings (CH) of firms listed on the Saudi Arabian stock market, and how these cash reserves are subsequently perceived in the market valuation of the firm (FV). Design/methodology/approach In order to test our hypotheses, we analyzed a dataset comprising 1,104 firm-year observations of Saudi companies listed between 2008 and 2019. Data were collected manually from the annual and governance reports of these firms, which were obtained from the Saudi Stock Exchange. To assess AEM, we utilized three variations of the modified Jones model. To ensure the robustness of the results, an assessment was conducted using abnormal working capital accruals as calculated according to the model proposed by Dechow and Dichev (2002). Findings We found considerable evidence that companies engaging in more extensive AEM practices tend to maintain larger cash reserves. In addition, AEM has a negative impact on the market value of cash holdings in the Saudi Arabian stock market. Investors take into account the agency costs associated with CH when AEM is involved, leading them to devalue cash due to their expectations of inefficient CH usage within these companies. Practical implications The findings of this research underscore the importance of regulating AEM in developing markets and improving corporate governance to mitigate the possible adverse effects of AEM on CH and FV. Originality/value This research is among the pioneering efforts to investigate the impact of EM on both the book and market values of cash reserves in Saudi Arabia, a key emerging market within the Middle East and Gulf Cooperation Council (GCC) nations.