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The Impact of Financial Leverage on Accrual-Based and Real Earnings Management

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  • Hamidreza Vakilifard
  • Mahboobe Sadat Mortazavi

Abstract

A review of accounting literature on earnings management indicates that leverage limits earnings management due to the scrutiny of auditors and regulators. Since these studies survey the relation between leverage and accrual-based earnings management, it is predicted that leveraged firms manage their earnings through real activities manipulation. Therefore the purpose of this paper is to examine whether leverage lead to move from accrual-based earnings management to real earnings management. The statistic sample of the paper is including 118 firms listed in Tehran Stock Exchange over the period of 2008- 2013. The multiple regressions analysis based on paneled data was the methodology employed for verifying the relations between leverage and two strategies of earnings management. The results indicate that managers tend to engage more in real earnings management than accrual-based earnings management once leverage is increasing. This finding highlight that focusing only on accrual-based earnings management underestimates the total earnings management activities.

Suggested Citation

  • Hamidreza Vakilifard & Mahboobe Sadat Mortazavi, 2016. "The Impact of Financial Leverage on Accrual-Based and Real Earnings Management," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(2), pages 53-60, April.
    • Handle: RePEc:hur:ijaraf:v:6:y:2016:i:2:p:53-60
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    References listed on IDEAS

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    8. Braam, Geert & Nandy, Monomita & Weitzel, Utz & Lodh, Suman, 2015. "Accrual-based and real earnings management and political connections," The International Journal of Accounting, Elsevier, vol. 50(2), pages 111-141.
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    Cited by:

    1. Ana Belen Tulcanaza-Prieto & Younghwan Lee & Jeong-Ho Koo, 2020. "Effect of Leverage on Real Earnings Management: Evidence from Korea," Sustainability, MDPI, vol. 12(6), pages 1-20, March.
    2. Bilal Kimouche, 2022. "Accrual-based and cash-based earnings management in Algeria: substitution or complementary," Croatian Review of Economic, Business and Social Statistics, Sciendo, vol. 8(1), pages 1-17, June.
    3. Asim, Aysha & Ismail, Aisha, 2019. "Impact of Leverage on Earning Management: Empirical Evidence from the Manufacturing Sector of Pakistan," Journal of Finance and Accounting Research, University of Management and Technology, Lahore, vol. 1(1), pages 70-91, February.
    4. Lazzem, Safa & Jilani, Faouzi, 2018. "The impact of leverage on accrual-based earnings management: The case of listed French firms," Research in International Business and Finance, Elsevier, vol. 44(C), pages 350-358.
    5. Ahmad Almashaqbeh & Hasnah Shaari & Hijattulah Abdul-Jabbar, 2019. "The Effect of Board Diversity on Real Earnings Management: Empirical Evidence From Jordan," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(5), pages 495-508, August.
    6. Zhen-Jia-Liu, 2021. "Effect Of Fuel Price Volatility On Real Activities Earnings Management In Airlines Related To Fuel Price Hedging," Economics and Management, Faculty of Economics, SOUTH-WEST UNIVERSITY "NEOFIT RILSKI", BLAGOEVGRAD, vol. 18(1), pages 33-53.
    7. Isaac Selasi Awuye & François Aubert, 2022. "The impact of leverage on earnings management and the trade-off between discretionary accruals and real earnings management," Post-Print hal-03824383, HAL.
    8. Ogiriki Tonye & Iweias Seth Sokiri, 2020. "Financial Leverage on Earnings Management of Quoted Manufacturing Companies in Nigeria," International Journal of Management Science and Business Administration, Inovatus Services Ltd., vol. 6(4), pages 7-21, May.
    9. Giuseppe Iuliano & Gaetano Matonti, 2015. "Do big 4 audit companies detect earnings management and report it in the audit opinion? Empirical evidence from italian non-listed firms," ESPERIENZE D'IMPRESA, FrancoAngeli Editore, vol. 2015(2), pages 5-43.

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