Prediction of Future Returns through Earning Management: A Case of Pakistan

Abstract

Companies world over are often found indulge in activity of hiding their real financial positions by decorating their financial statements with false digits. This concept referred to as earning management, which plays a significantly critical role in investor performance in stock market. In this paper analysis of probability of earnings manipulation using Beneish Model is performed. Sample comprised of two sectors; Sugar and Cement as listed at Karachi stock exchange. Various firms in Cement and Sugar Sector were distinguished as manipulators and non-manipulators as per the data analysis. Results predicted that 54.65% of the companies were manipulating their performance through window dressing and remaining 45% were non manipulators. Methodology to apply Beneish Model as opted from Beneish basic paper (1997) was used which marked manipulator companies with value as “1” and non-manipulator companies by “0” with the objective to benefit investor of the stock market and save them from getting misguided by false financial statements. The variable of the study as calculated by the help of those 8 variables included in Beniesh model is called PROBM (Probability of Manipulation). The study also explores ability of PROBM to predict the future returns. Results revealed that PROBM and other variables remained insignificant in predicting future period returns in the context of Pakistani stock market