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Does a change in debt structure matter in earnings management? the application of nonlinear panel threshold test

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Listed:
  • Yu-Shu Cheng

    (Doctoral Candidate, Graduate School of Management, Taiwan)

  • Yi-Pei Liu

    (Doctoral Candidate, Department of Accounting, Taiwan)

Abstract

In this study, we apply Hansen¡¦s (1999) nonlinear panel threshold test, the most powerful test of its kind, to investigate the relationship between debt ratio and earnings management of 474 selected Taiwan-listed companies during the September 2002 - June 2005 period. Rather than a fixed positive relation that is determined from the OLS, our empirical results strongly suggest that when a firm¡¦s debt ratio exceeds 46.79% and 62.17%, its debt structure changes, which in turn leads to changes in earnings management. With an increase in debt ratio, managers tend to manage earnings to a greater extent and at a higher speed. In other words, the threshold effect of debt on the relationship between debt ratio and earnings management generates an increasingly positive impact. These empirical results provide concerned investors and authorities with an enhanced understanding of earnings management, as manipulated by managers confronted with different debt structures.

Suggested Citation

  • Yu-Shu Cheng & Yi-Pei Liu, 2008. "Does a change in debt structure matter in earnings management? the application of nonlinear panel threshold test," Economics Bulletin, AccessEcon, vol. 13(4), pages 1-10.
    • Handle: RePEc:ebl:ecbull:eb-08m40001
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    References listed on IDEAS

    as
    1. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
    2. DeFond, Mark L. & Jiambalvo, James, 1994. "Debt covenant violation and manipulation of accruals," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 145-176, January.
    3. Warfield, Terry D. & Wild, John J. & Wild, Kenneth L., 1995. "Managerial ownership, accounting choices, and informativeness of earnings," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 61-91, July.
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    More about this item

    JEL classification:

    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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