The moderating role of audit quality between earning management and sustainable investment opportunities: Evidences from gulf cooperation council countries

Abstract

This study examines the relationship between the earning management and audit quality on sustainable investment opportunities in the Gulf Cooperation Council (GCC) countries, including, Bahrain, Oman, Qatar, Saudi Arabia, Kuwait and United Arab Emirates. Further, moderating relationship of audit quality between earnings management and sustainable investment is also investigated in the present study. This study includes the data of 1337 companies and their-year observations from the period of 2011 to 2017. This study used the Panel Data Ordinary Least Squares with correlated random effect to examine the direct relationship and the moderated multiple regression to examine the moderating effects of audit quality on the earnings management and sustainable investment opportunities relationship. The results demonstrate that the earnings’ management encompasses a significant negative relationship with sustainable investment opportunities but on the other side, it also displays a positive relationship between audit quality and sustainable investment opportunities. Furthermore, the study investigates the moderating effect of audit quality on the relationship of earning management and sustainable in-vestment opportunities. Empirical evidence suggests that the audit quality plays a vital role in mitigating the agency theory problem and reducing the information asymmetry. These findings suggest that the big audit firms act as a good governance representatives for the management and it further enhances the credibility of accounting information for the new investors. This research has several usages for policymakers and investors in the GCC. The investors should assess their choice when they are investing in firms. The big auditing firms mitigates earnings management, which may raise sustainable investment opportunities. Thus, listed firms in the GCC should implement governance and disclosure practices that strengthen the credibility of financial earnings and reduce the danger for investors who later discovers poor investment decisions.