The impact of earnings quality on financial performance through financial flexibility: An applied study of the banking sector listed on the Iraq Stock Exchange

Abstract

This study aims to examine the impact of earnings quality on financial performance, while analyzing the mediating role of financial flexibility in banks listed on the Iraq Stock Exchange. The study addresses a research gap characterized by limited evidence regarding the mechanism by which earnings quality is transmitted to financial performance via financial flexibility. The study employed an analytical approach using data from 15 banks over the period 2015–2024, comprising a total of 150 observations. Earnings quality was measured using the Dechow and Dichev model (2002), financial flexibility using the current ratio, and financial performance measured by return on assets (ROA). Structural equation modeling (SEM) was used with AMOS 2023 software and the maximum likelihood method (ML) to analyze the direct and indirect relationships.

The results showed a significant positive impact of earnings quality on financial flexibility, while both financial flexibility and earnings quality had a significant negative impact on financial performance. The results also demonstrated that financial flexibility acts as a partial mediator in the relationship between earnings quality and financial performance, indicating that enhancing earnings quality contributes to improving companies' financial capacity. However, maintaining high levels of financial flexibility may negatively impact financial performance in the short term due to the opportunity cost of idle funds. The study recommends adopting policies that strike a balance between enhancing earnings quality and maintaining appropriate levels of financial flexibility, thereby supporting long-term financial performance and sustainability