Estimating Earnings Management Metrics and Examining Their Determinants and Impacts on Banks' Performance: Evidence from Banks Listed in the Saudi Capital Market

The study aimed to estimate earnings management proxies and investigate their determinants and impacts on the performance of Saudi banks from 2013 to 2022. The study used the discretionary components of the loan and investment portfolio as a proxy for the earnings management index.  The results showed that Saudi banks engaged in earnings Management downwards. Still, to a lesser extent, the actual provisions for loan losses exceeded the expected value of provisions for loan losses, and the residuals of the regression models were positive and had a normal distribution. Regarding the determinants of earnings management, financial leverage, bank size, net operating profits before loan provisions, and gross domestic product (GDP) were identified as significant factors.  Regarding the impacts of earnings management proxies on banks' performance, the results showed that earnings management proxy as a mediator variable had no effect on return on assets or equity. However, earnings management as a mediator variable statistically affected the stock price, stock returns, and earnings per share. In addition, the results showed that Saudi banks utilized the signal theory to convey private information on discretionary components, creating a positive outlook for future years' profits and cash flow. Investors in the Saudi capital market responded positively to this private information when pricing stocks. The study's results are expected to have significant empirical implications for stakeholders, including capital market investors, regulatory authorities, bank managers, and external auditors. It provided reasonable evidence that Saudi banks are well-capitalized and that their managers did not use opportunistic practices to increase profits