DECONSTRUCTING ACCRUAL QUALITY: UNVEILING THE RELATIONSHIP BETWEEN MARKET-BASED ACCOUNTING MEASURES AND ACCRUAL MANIPULATION IN SAUDI ARABIAN COMPANIES

Abstract

This research investigates market-driven accounting metrics and the manipulation of accruals within Saudi Arabian corporate entities. Stakeholders such as financial practitioners, policymakers, and researchers in Saudi Arabia stand to gain insights into the determinants of accrual quality through the findings of this study. This research scrutinizes market-based accounting indicators, firm-specific attributes, and contextual factors, with particular emphasis on Tobin's Q, firm size, leverage, growth, and auditor reputation. The application of the most recent selection bias correction technique, namely Propensity Score Matching (PSM), enhances the internal validity of the research. The study relies on Saudi Arabian industry annual reports spanning the years 2010 - 2022 to bolster the credibility of its findings. Saudi companies display varied factors influencing accrual quality. A notable correlation exists between Tobin's Q and accrual quality, signifying superior quality for entities with market values exceeding book values. Conversely, a negative association is observed between company accrual quality and higher book-to-market ratios. Larger organizational sizes are linked to enhanced accrual quality, while leverage diminishes it, highlighting the impact of financial risk on reporting practices. Accrual  quality also benefits from growth and auditor reputation, emphasizing external validation and monitoring. To alleviate selection bias, this study utilizes PSM, establishing a statistically equivalent control group for each treated organization. This method enhances comparisons among entities with varying accrual quality, addressing a crucial challenge in observational research. Incorporating industry dummies, year dummies, and moderating variables contributes to a theoretical understanding of accrual quality characteristics, enriching Saudi literature. This study presents applications that extend to financial advisors and policymakers, offering valuable insights for informed investment decisions and legislative effectiveness. The determinants identified herein serve as practical tools for stakeholders seeking to make judicious financial choices. The findings underscore the importance of upholding rigorous auditing standards and shed light on the impact of reputation on accrual quality, providing guidance for auditors. Moreover, the study lays a foundation for future research endeavours exploring market-based accounting metrics and accrual quality in contexts beyond Saudi Arabia, thereby contributing to theoretical advancements.