COVID-19 Lockdown, Earnings Manipulation and Stock Market Sensitivity: An Empirical Study in Iraq

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COVID-19 Lockdown, Earnings Manipulation and Stock Market Sensitivity: An

Empirical Study in Iraq

ArticleinJournal of Asian Finance Economics and Business · May 2021

DOI: 10.13106/jafeb.2021.vol8.no5.0707

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Bushra Abdul Wahhab ALJAWAHERI, Hassnain Kadhem OJAH, Ahmed Hussein MACHI, Akeel Hamza ALMAGTOME /

Journal of Asian Finance, Economics and Business Vol 8 No 5 (2021) 0707–0715 707707

Print ISSN: 2288-4637 / Online ISSN 2288-4645

doi:10.13106/jafeb.2021.vol8.no5.0707

COVID-19 Lockdown, Earnings Manipulation and

Stock Market Sensitivity: An Empirical Study in Iraq

Bushra Abdul Wahhab ALJAWAHERI

1

, Hassnain Kadhem OJAH

2

, Ahmed Hussein MACHI

3

,

Akeel Hamza ALMAGTOME

4

Received: January 30, 2021 Revised: April 05, 2021 Accepted: April 15, 2021

Abstract

This article examines the potential impact of the Covid-19 Lockdown on earnings manipulation and stock market sensitivity to earnings

announcements. It also explores the effects of earnings manipulation after the COVID-19 outbreak on the share price sensitivity to the

earnings disclosures. The study uses a quantitative method to analyze the financial data consisting of 87 firms listed on the Iraq Stock

Exchange for the period from 2018 to 2020, which constitutes a total of (174 observations). We used Ohlson (1995) model to estimate

financial market reaction and sensitivity to earnings manipulation fluctuations and accounting information. The results show that companies

practice earnings manipulation to maintain earnings over a time series, which means a negative impact of earnings manipulation on all

earnings measures’ value relevance (EPS, BVS, and CFS). Accordingly, earnings manipulation negatively influences investor behavior

in the financial market, based mainly on financial reporting. The value relevance of financial reports has also decreased because of the

COVID-19 outbreak and related economic Lockdown. These results reflect a long-term adverse impact of earnings manipulation on investor

behavior and financial statements reliability.

Keywords: Economic Lockdown, COVID-19, Earning Manipulation, Stock Market Sensitivity

JEL Classification Code: E16, H83, M41, Q56

was the first victim of this epidemic, and the Covid-19

virus exhibited widespread and remarkable shock waves

in all Capital markets. After Europe and the United States,

Iraq recorded the first case in early February 2020, which

disrupted all country’s economic and financial activities.

This epidemic has shocked the entire global economy (Sun

et al., 2021). On the one hand, it exposed the imbalances

that have long characterized financial regulation. On the one

hand, it negatively affected all financial aspects globally

due to most countries’ containment measures. Investors’

positive behavior and the intervention of the supervisory

authorities on the financial markets in terms of regulation

and awareness of investors were among the main factors in

managing the current global economic crisis (Lee, 2020).

The novel coronavirus pandemic, which is also known as

SARS-CoV-2, is causing a shock to the global economy,

triggering an unprecedented economic sudden halt (Arfah

et al., 2020). This time, the situation is different for at

least two reasons. First, its impact on the overall economy

is more significant than any catastrophic bouts of the past

40 years. The containment measures taken to limit the spread

1

First Author. Lecturer, Department of Accounting, Faculty

Administration and Economics, University of Kufa, Iraq.

Email: bushraa.aljawaheri@uokufa.edu.iq

2

Lecturer, Department of Accounting, Faculty Administration and

Economics, University of Kufa, Iraq.

Email: hassnink.alshahmani@uokufa.edu.iq

3

Lecturer, Department of Accounting, Faculty Administration and

Economics, University of Kufa, Iraq.

Email: ahmedh.maji@uokufa.edu.iq

4

Corresponding Author. Lecturer, Department of Accounting, Faculty

Administration and Economics, University of Kufa, Iraq [Postal

Address: Prof. Dr. Akeel Hamza Almagtome, University of Kufa,

Najaf, 540011, Iraq] Email: akeelh.alhasnawi@uokufa.edu.iq

This is an Open Access article distributed under the terms of the Creative Commons Attribution

Non-Commercial License (https://creativecommons.org/licenses/by-nc/4.0/) which permits

unrestricted non-commercial use, distribution, and reproduction in any medium, provided the

original work is properly cited.

1. Introduction

After China announced several cases of COVID-19 at the

end of December 2019, which was later identified as a new

member of the coronavirus family, the global stock market

Bushra Abdul Wahhab ALJAWAHERI, Hassnain Kadhem OJAH, Ahmed Hussein MACHI, Akeel Hamza ALMAGTOME /

Journal of Asian Finance, Economics and Business Vol 8 No 5 (2021) 0707–0715708

of the virus have brought the global economy to a standstill.

Second, governments’ economic responses worldwide are

based on a set of policy strategies and measures, including,

but not limited to, public health measures, fiscal measures,

macroprudential measures, and monetary or market

measures.

Regarding business and jobs, the markets responded

to the Corona pandemic with sharp declines, and investor

uncertainty rose to record levels which was not seen since

the global financial crisis of 2007–2009. On the other hand,

the financial market uses financial reporting information to

evaluate the companies’ future performance expectations,

which is usually derived from past performances, through

financial market perceptions of this information’s reliability

(Chen & Gong, 2019). Earnings per share should be

appropriate in determining stock prices and influencing

investor behavior when current activities reflect the

company’s success in employing its resources effectively

(Kumar, 2018). Several studies such as by Burgstahler and

Eames (2006), and Das et al. (2011) have examined the

response of stock prices to a dividend declaration. The three

most essential criteria for earnings in the financial market

are the level of earnings and avoiding losses, changes in

earnings related to its improvement and stability to some

extent, and analysts’ expectations about its performance.

These criteria are used as the basis for evaluating corporate

issuances, which are at the same time essential for investors

to make their investment decisions. Therefore, managers

evaluation of the performance of these institutions. Earnings

Manipulation will have short-term effects on the financial

market (Lee & Sung, 2021).

Budagaga (2017) indicates that earnings and book value

can express inventory values and variances in these values

and can be computed as information with appropriate values.

Koonce et al. (2011) also examined how investors react to

profit trends which is based performance based on financial

analysts’ expectations and motivations over multiple periods.

While it is based on the book value, its resources are directed

to alternative uses better than the current situation. The

results also indicate that investors use both metrics because

they have found that both metrics provide information about

the company’s expectations and management credibility. In

the current paper, we seek to determine the impact of the

Corona epidemic’s implications on stock prices’ sensitivity

to manipulating accounting numbers using an event

study approach. None of the previous publications on our

knowledge address the pandemic’s impact on accounting

numbers manipulation levels in the stock market. Therefore,

our study attempts to fill a research gap related to the effect

of the Corona pandemic’s implications on the sensitivity

of financial markets to the cases of fraudulent accounting

declared by companies.

Accordingly, the contributions of this research can be

summarized as follows:

• Determine the level and trend of manipulating

accounting earnings to explain their motives, whether