Earnings Quality and its Determinants in the Saudi Capital Market: Evidence from Accrual-Based Models under IFRS Reform

This study investigates the determinants of earnings quality (EQ) among non-financial firms listed on the Saudi Stock Exchange (Tadawul) from 2009 to 2017. In light of Saudi Arabia’s regulatory transformation under Vision 2030 and the adoption of International Financial Reporting Standards (IFRS), the study applies the Ball and Shivakumar (2006) model, to evaluate the reliability of reported earnings. Using panel data from 742 firm-year observations across 79 firms and employing fixed effects (FE) regression, the study explores how firm-specific characteristics, such as financial leverage, profitability, size, growth, dividend policy, firm age, accounting losses, and IFRS adoption, affect EQ.
The results reveal that operational profitability (OROA) and accounting losses are the most significant predictors of EQ, with higher profitability improving reporting integrity and losses increasing the likelihood of earnings management. Firm size also shows a consistent positive relationship with EQ. Conversely, financial leverage, firm age, and revenue growth do not exhibit significant impacts. The adoption of IFRS is found to enhance EQ, although the effect is more evident in the ordinary least squares (OLS) model than in the FE model.
These findings contribute to the accounting literature by extending the application of global EQ models to the Saudi context and offering policy recommendations for regulators and practitioners. The study underscores the importance of internal performance and regulatory reforms in promoting financial transparency and improving investor confidence in emerging markets.