The Firm Strategy, Real Earnings Management and Ownership Cost: An Analytical Study

Abstract

The purpose of this paper is to assess the relationship between a company's strategy, the administration of actual profits, and the cost of ownership. The deductive method was used to present the theoretical aspect of the research. On the practical side, data from the financial statements of a sample of Iraqi companies listed on the Iraq Stock Exchange for the period (2011-2020) were utilized, as the study sample consisted of ten companies. The study measured the strategy using a scale comprised of six proportions for the various dimensions of corporate strategy: (1) research and development expenditures for sales (product development or new product discovery); (ii) selling and general and administrative expenses of sales (capturing marketing efforts); (iii) the annual percentage change in sales (the company's growth chart); (4) Personnel to sales (demonstrates production efficiency); and (v) Net profit margin. The management of real profits was evaluated based on "manipulation in sales, manipulation in production, and manipulation in optional expenses," while the cost of equity was evaluated using the capital asset pricing model. The Finidngs indicate that The management of companies should periodically evaluate the type of strategy in accordance with the requirements of their work under competitive conditions, and should not abuse the practice of managing profits with actual activities in a manner that is detrimental to the company's interests. Before making investment decisions, analysts, proprietors, and investors must calculate the systemic risk factor (beta) and the rate of return on investment in the target companies and compare them with the risk-free rate of return.