Earnings management and debt maturity: Evidence from Italy

Abstract

In this work, we examine whether earnings management affects the debt maturity structure of Italian non-SMEs. We employ accruals quality as a proxy for earnings management. We measure the accrual quality as the absolute value of residual reflects the accruals that are not related to cash flow realized in the current, following or previous year. We measure the debt maturity in two ways. First, we consider it as a dummy variable that takes the value equal to 1 if some of the debt is long-term (exceeding one year), and 0 otherwise. Second, we compute the debt maturity as the ratio of long-term debt to total debt. We employ a quantitative approach, carrying out several regressions (probit, logit, and tobit) analyses to investigate the effect earnings management on debt maturity structure, using financial statement data of 1,001 Italian non-SMEs sampled over the period 2011-2017. This paper provides theoretical and practical findings that support the literature on earnings management. First, the study confirms that accrual quality can use as a proxy of earnings management by the academic community. Then the findings show that earnings management is negatively associated with the possibility to access to long-term debt, and with a proportion of long-term debt in total debt. This evidence may support the managers when they have to plan the financial structure, the lenders and the creditors in their decision-making processes, and the policymakers when they have to set programs aimed to make easier the access to external financial resources.

The Role of Integrated Reporting in Emerging Market: Earnings Quality and Debt Maturity

“…Companies that practice earnings management through discretionary accruals (showing lower earnings quality) impact debt contracts granted by lenders. The results of this study are also in line with (Rey et al, 2020) and (De Meyere et al, 2018), which found that companies with higher earnings quality tend to have a larger proportion of long-term debt. The quality of earnings reported by the company will affect the quality of financial reporting as a whole.…”

“…Profits of companies that can better predict future cash flows can reduce information asymmetry between creditors and debtors to increase the company's ability to access long-term debt. This finding is in line with (Maurice et al, 2020) and (Rey et al, 2020), which shows that companies that carry out aggressive earnings management activities tend to have lower long-term debt structures. However, the results of studies on the effect of earnings quality on debt maturity are still contradictory.…”

“…In the context of information asymmetry and agency conflict, the higher the reported earnings quality of the company can encourage the company to obtain debt with a longer maturity (García-teruel et al, 2010). In addition, (VanKhanh and Hung, 2020), (Rey et al, 2020), and(De Meyere et al, 2018) that companies with higher earnings quality tend to have a more significant proportion of long-term debt. Therefore, the presentation of IR that can improve the quality of corporate reporting can moderate the effect of earnings quality on debt maturity.…”

“…Previous studies examine the factors that affect debt maturity include systematic risk (H. Chen et al, 2021), cost stickiness (Habib and Costa, 2021), financial statement's comparability (Do, 2020), green credit policy (Xu and Li, 2020), earnings management (Maurice et al, 2020;Habib and Costa, 2021;Rey et al, 2020), earnings quality (VanKhanh and Hung, 2020;De Meyere et al, 2018), corporate social responsibility (Nguyen et al, 2020), corporate investment (Jungherr and Schott, 2020; Adachi-Sato and Vithessonthi, 2019), policy uncertainty (Datta et al, 2019;Pan et al, 2019), accounting conservatism (Salehi and Sehat, 2019), asset quality (Olibe et al, 2019;Gong and Wei, 2019), and fair value accounting (Ghanbari et al, 2018;Wang and Zhang, 2017). (Casino-Martínez et al 2019), (Manuelli, 2019), and(Kashefi Pour andLasfer, 2019) investigate the effect of country characteristics and macroeconomic factors on debt maturity.…”

“…To measure debt maturity, the authors use models from previous studies such as in the research of (VanKhanh and Hung, 2020), (Rey et al, 2020), (Maurice et al, 2020), (Olibe et al, 2019), and(De Meyere et al, 2018). DM is calculated as the ratio of longterm debt (more than one year) compared to total debt (sum of short-term debt and longterm debt).…”