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The Interplay of Leverage, Financing Constraints and Real Earnings Management: A Panel Data Approach

Risks (Basel), 2022-06, Vol.10 (6), p.110 [Peer Reviewed Journal]

2022 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/). Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;ISSN: 2227-9091 ;EISSN: 2227-9091 ;DOI: 10.3390/risks10060110

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  • Title:
    The Interplay of Leverage, Financing Constraints and Real Earnings Management: A Panel Data Approach
  • Author: Hussain, Ammar ; Akbar, Minhas ; Khan, Muhmmad Kaleem ; Sokolová, Marcela ; Akbar, Ahsan
  • Subjects: Accounting ; Earnings management ; financing constraints ; Hypotheses ; leverage ; Longitudinal studies ; panel data ; real earnings management ; Stockholders
  • Is Part Of: Risks (Basel), 2022-06, Vol.10 (6), p.110
  • Description: Organizations are formed to gain long-term benefits. However, sometimes myopic management for feigned value enhancement led to the early demise of the firm. Further, to the best of our knowledge empirical role of financing constraints has not yet been explored between the relationship of leverage and earnings management practices. Therefore, the present study aims to empirically examine the impact of leverage on Real Earnings Management (REM) practices and how financing constraints influence this association. Employs a panel dataset of 3250 non-financial Chinese listed firms for a time period spanning from 2009 to 2018. Leverage is categorized into short-term, long-term, and total leverage to check the individual effects of each leverage category on REM practices. The data were analyzed through panel data fixed-effects and random-effects techniques as an econometric approach. First, consistent with positive accounting theory, the impact of total leverage on REM is positive. Second, compared to the long-term leverage, short-term leverage has more pronounced effects on managers’ opportunistic behavior towards using REM. Third, the influence of total leverage is higher (lower) on REM practices in financially unconstrained (constrained) firms. Fourth, the influence of short-term leverage on REM practices compared to long-term leverage is also weak in the financially constrained firms. These findings imply that, to avoid the consequences of managerial myopia, investors should abstain to invest in the firms that use higher amount of short-term debt and are financially unconstrained. This study is the first research to examine the impact of different leverage categories on REM practices in an emerging market, i.e., China, where the legal and financial structure is much poor.
  • Publisher: Basel: MDPI AG
  • Language: English
  • Identifier: ISSN: 2227-9091
    EISSN: 2227-9091
    DOI: 10.3390/risks10060110
  • Source: ROAD: Directory of Open Access Scholarly Resources
    ProQuest Central
    DOAJ Directory of Open Access Journals
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