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External financing and earnings management: Evidence from international data

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  • Zhang, Yuyang
  • Uchida, Konari
  • Dong, Liping

Abstract

Corporate financing conditions in the external capital market are significantly affected by information asymmetry, while internal financing is not. Given that earnings information influences market perceptions regarding firms’ quality, firms relying on external financing should have incentives to manage earnings to improve their financing conditions. This study investigates the effect of corporate external financing behavior on earnings management. Using a sample comprising 75,790 observations of 12,874 firms in 43 countries, we find that accrual-based and real earnings management are positively associated with firms’ reliance on external financing. This positive relationship holds especially true for firms that rely on equity rather than debt financing. We argue that reliance on external financing (especially equity financing), which is subject to problems arising from information asymmetry, generates a motive for earnings management.

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  • Zhang, Yuyang & Uchida, Konari & Dong, Liping, 2020. "External financing and earnings management: Evidence from international data," Research in International Business and Finance, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:riibaf:v:54:y:2020:i:c:s0275531920300088
    DOI: 10.1016/j.ribaf.2020.101275
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    Cited by:

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    2. Chee Yoong Liew & YoungKyung Ko & Bee Lian Song & Saraniah Thechina Murthy, 2022. "Directors’ compensation, ownership concentration and the value of the firm: evidence from an emerging market," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 49(1), pages 155-188, March.

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    More about this item

    Keywords

    External financing; Financing conditions; Information asymmetry; Earnings management; International;
    All these keywords.

    JEL classification:

    • F39 - International Economics - - International Finance - - - Other
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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