The effect of debt maturity structure on earnings management strategies

Draief, Sondes; Chouaya, Adel

doi:10.1108/mf-07-2021-0314

Cited by 6 publications

(6 citation statements)

References 85 publications

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“…Hence, results are in partial support of signaling theory as well as agency theory. Moreover, results confirm the findings of Lassoued (2022), Okyere et al (2021) and Draief and Chouaya (2022) which suggests that managers are more likely to manage earnings through REM instead of adjustments in accruals. The rationale for these findings is that the use of debt induces The validation of these results is evident from the fact that Pakistan is a bank-based economy coupled with less developed financial markets.…”

Section: Discussionsupporting

confidence: 85%

Capital structure and earnings management: evidence from Pakistan

Naz

Sheikh²

2022

IJAIM

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Purpose The purpose of this study is to investigate whether capital structure affects accruals and real earnings management (AEM and REM) of nonfinancial firms listed on Pakistan Stock Exchange (PSX). Moreover, to investigate whether institutional development (ID) moderates the relation between capital structure and earnings management (EM). Design/methodology/approach Data were taken from annual reports of nonfinancial firms listed on the PSX during 2012–2019. Data of 150 firms for a period of eight years were found completed with respect to the variables used in this study. The generalized moments of methods estimator is used to estimate the effects of explanatory variables on earning management. Furthermore, fixed and random effects methods were used to estimate the impact of capital structure on AEM and REM. Findings Results show that all three measures of capital structure (i.e. total debt ratio, long-term debt ratio and short-term debt ratios) are inversely related to AEM. In contrast, all measures of capital structure are positively related to abnormal cash flow from operations. Total debt ratio and long-term debt ratio are negatively while short-term debt ratio is positively related to abnormal discretionary expenses. Total debt ratio and short-term debt ratio are significant and negatively related to abnormal production cost. Additionally, interaction terms of ID (i.e. rule of law and regulatory quality) significantly moderate the controlling role of debt on discretionary accruals. In sum, results show that the use of debt induces lender's monitoring. Consequently, managers move toward REM because of lower probability of being exposed. Practical implications Findings of this study have significant implications for managers and regulatory authorities. For instance, the use of debt increases the lender’s influence which restricts the managers to be involved in EM practices. Moreover, regulatory authorities are required to address the loopholes in regulations to refrain the managers to be engaged in EM. Originality/value To the best of the authors’ knowledge, this is the first study in Pakistan that has explored the impact of capital structure on AEM and REM. More importantly, a careful review of the literature affirms that this study is among the few studies that have used ID as a moderating variable to explain the relation between capital structure and EM.

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Section: Discussionsupporting

confidence: 85%

Capital structure and earnings management: evidence from Pakistan

Naz

Sheikh²

2022

IJAIM

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“…This serves as an indicator that firms can weigh up the costs and benefits associated with real earnings management. The result is also consistent with Draief & Chouaya (2022), which documents a positive relationship between real earnings manipulation and short-term debt maturity for U.S firms.…”

Section: Source: Calculation By the Author From Analysis Datasupporting

confidence: 83%

“…Vietnam -an emerging market -where the earnings management activity of a company is highly influenced by firm-bank relationships. There is one study that analyzes the relationship between debt maturity and real earnings management, but the research context is the US (see Draief & Chouaya, 2022), an economy with much different institutional setting and development level of financial markets.…”

Section: Nguyen Thanh Liem Trinh Quoc Trung Nguyen Vinh Khuong Cao Th...mentioning

confidence: 99%

Is short term debt maturity linked to real earning management?

Nguyen¹,

Trung²,

Khương³

et al. 2022

Management

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Summary This paper explores the association between the maturity of short-term debt and real earnings management in the context of an emerging market. We use a panel dataset of listed firms in Vietnam over the period from 2009 to 2017 and employ conventional methods for panel data analysis. Our work contributes by documenting a non-linear relationship between short-term debt maturity and manipulation of earnings. In particular, businesses prefer to refrain from manipulating earnings at low short-term debt maturity levels but are likely to manage them at higher short-term debt maturity levels. Under a battery of robustness evaluations, this result remains unchanged. This means that investors/lenders of firms should be vigilant with the information recorded on financial statements because managers can manage corporate earnings, especially at high short-term debt levels.

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“…Strong governance may have a positive impact on firm performance by reducing both types of earnings management (Harris and Erkan, 2023). Preference between these two types of earnings management may be impacted by the strength of governance mechanism or based on operating and financing decisions made by a firm, such as real earnings management being preferred when short-term debt is increasing or during a seasoned equity offering (Draief and Chouyua, 2022; Kothari et al ., 2016).…”

Section: Literature Reviewmentioning

confidence: 99%

The impact of co-opted executives on earnings management

Valenzuela,

Zheng

2023

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PurposeThe authors seek to analyze the impact of weak corporate governance by top executives of a firm on the firm's earnings reports. This research is meant to further emphasize the impact of co-opted executives on a firm, primarily through their impact on earnings management.Design/methodology/approachUsing financial data from 11,473 firm-year observations, the authors utilize ordinary least squares (OLS), 2-stage IV regressions, propensity score matching (PSM) and entropy balancing to analyze the impact of a co-opted top management team on discretionary accruals and restatements.FindingsThe authors find empirical evidence that firms with weak corporate governance from top executives are more likely to manipulate reported earnings and have lower financial reporting quality. The authors also find that the effect of co-opted executives on earnings management is weaker when a chief executive officer's (CEO’s) incentives are not aligned with those of top executives, suggesting that executives prevent earnings management due to reputational concerns. Co-opted chief financial officers (CFOs) increase the magnitude of earnings management in a firm but are not solely responsible for the authors' results.Originality/valueThe authors' results suggest that the top executive team provides an important first defense in the prevention of earnings management and corporate wrongdoing. Co-option of the top executive team may be an important consideration when doing research into corporate governance.

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The effect of debt maturity structure on earnings management strategies

Cited by 6 publications

References 85 publications

Capital structure and earnings management: evidence from Pakistan

Capital structure and earnings management: evidence from Pakistan

Is short term debt maturity linked to real earning management?

The impact of co-opted executives on earnings management

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