Earnings Manipulation and Adjustment Speed towards an Optimal Leverage

Subject Areas : Financial Accounting

Abbas Aflatooni ¹ , Mahdi Khazaei ² , Zahra Nikbakht ³

1 - Department of Accounting, Bu-Ali Sina University, Hamedan, Iran
2 - Department of Accounting, Bu-Ali Sina University, Hamadan, Iran
3 - Department of Management, Economics and Accounting, Payam Noor University (PNU), P.OBox, 19395-4697 Tehran, Iran

Received: 2020-10-19 Accepted : 2020-12-19 Published : 2021-07-01

Keywords: Optimal leverage, Real Activities Manipulation, Accrual-based earnings manipulation, Speed of adjustment, Leverage deviation,

Abstract :

This study examines whether the firms’ leverage adjustment speed is influenced by real and accrual-based earnings manipulation over the period 2006-2019. We find evidence suggesting that the leverage adjustment speed in firms with a higher level of real and accrual-based earnings manipulation is slower than that of other firms. Specifically, we show that under-levered (over-levered) firms with a higher level of earnings manipulation tend to adjust their actual leverage toward an optimal level, faster (slower) than that of other firms. These results are robust to different metrics for real and accrual-based earnings management, an alternative set of leverage determinants, alternative sample periods, and various estimation methods.

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