Sentiments, COVID-19, and the motivations for pro-forma earnings management in South Africa

Researchers have identified investor sentiment as influencing corporate decisions. Prior studies focus on its influence on stocks, investment, and corporate financing. This study restricts the sample to the financial-crisis-free periods (2012–2021) and explores how sentiments, pandemics, and other potential firm-level factors motivate earnings management in South Africa. The earnings management is measured based on the Jones model’s (modified Jones) discretionary accruals for the main (robustness) analysis, and the difference in price-earnings ratio index of sentiment was applied. The evidence identifies new insights. It was shown that the expected value of the discretionary accruals is non-drifted. Also, earnings manipulation reduces due to changes in sentiments, but the expected value increases due to the COVID-19 occurrence. In addition, sentiments during the pandemic do not hold predictively and clearly would not incentivise the managers to engage in earnings management. Investors need to consider the impact of the pandemic and sentiments on earnings management when formulating their investment strategies. The findings can potentially guide investors to be cautious and perceptive about financial reports during crises in light of the documented increase in the expected value of discretionary accruals due to COVID-19. The study's original contribution is to establish how sentiments impact the estimates of the pro forma EM, which overstate earnings. It also demonstrates how pandemics affect these estimates, and how sentiments due to COVID-19 influence these estimates using data from South Africa.