Earnings Management and Annual Reports Complexity: The Role of Cash Holdings and Board Characteristics in Egyptian Companies

Abstract

This research examines the relationship between earnings management (EM) and annual financial reports complexity (Lower readability) in the Egyptian publicly listed firms. Utilizing a panel dataset of 125 non-financial firms listed on the Egyptian Exchange (EGX) from 2018 to 2023, we investigate whether firms engaging in accrual-based earnings management (AEM) and real earnings management (REM) produce more complex financial disclosures. Current research employs LIX Index to measure the complexity, while Fog Index and ARI are used for robustness checks. Our results show that AEM has a weak, marginally significant impact on complexity, while REM is consistently associated with increased report complexity. Specifically, abnormal levels of production costs and discretionary spending significantly increase the textual complexity, whereas abnormal cash flow has a weaker effect. Further, our results show that board governance characteristics and cash holdings influence the EM-complexity relationship. Board independence, female representation, and frequent board meetings mitigate the complexity introduced by REM. Additionally, we find that cash-rich firms engaging in REM produce significantly more complex financial reports, suggesting that financial flexibility enables firms to obscure earnings manipulation through verbose or convoluted disclosures. This study complements earnings management and financial disclosure literature by presenting empirical evidence on how corporate governance and liquidity conditions shape financial reporting transparency in an emerging market. The findings have practical consequences for regulators, investors, and corporate boards, emphasizing the need for stronger governance oversight and targeted regulatory measures to improve financial report readability.