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:

References:

[1] Abad, D., Cutillas-Gomariz, M.F., Sánchez-Ballesta, J.P., Yagüe, J., Real earnings management and information asymmetry in the equity market, European Accounting Review, 2018, 27(2), P. 209-235. Doi: 10.1080/09638180.2016.1261720

[2] Aflatooni, A., Mansouri, K., Opaque information, deviation from target leverage and speed of adjustment, Advances in Mathematical Finance and Applications, 2019, 4(2), P. 15-29. Doi: 10.22034/amfa.2019.585872.1191

[3] An, Z., Li, D., Yu, J., Earnings management, capital structure, and the role of institutional environments, Journal of Banking and Finance, 2016, 68(1), P. 131-152. Doi: 10.1016/j.jbankfin.2016.02.007

[4] Anagnostopoulou, S.C., Tsekrekos, A.E., The effect of financial leverage on real and accrual-based earnings management, Accounting and Business Research, 2017, 47(2), P. 191-236. Doi: 10.1080/00014788.2016.1204217

[5] Arellano, M., Bond, S., Some tests of specification for panel data: Monte-Carlo evidence and an application to employment equations, Review of Economic Studies, 1991, 58(2), P. 277–297. Doi: 10.2307/2297968

[6] Baker, M., Wurgler, J., Market timing and capital structure, The Journal of Finance, 2002, 57(1), P. 1-32. Doi: 10.1111/1540-6261.00414

[7] Bazrafshan, E., Kandelousi, A.S., Hooy, C.W., The impact of earnings management on the extent of disclosure and true financial performance: Evidence from listed firms in Hong Kong, The British Accounting Review, 2016, 48(2), P. 206-219. Doi: 10.1016/j.bar.2015.09.001

[8] Bhattacharya, N., Desai, H., Venkataraman, K., Does earnings quality affect information asymmetry? Evidence from trading costs, Contemporary Accounting Research, 2013, 30(2), P. 482-516. Doi: 10.1111/j.1911-3846.2012.01161.x

[9] Bhattacharya, U., Daouk, H., Welker, M., The world price of earnings opacity, The Accounting Review, 2003, 78(3), P. 641-678. www.jstor.org/stable/3203220

[10] Blundell, R., Bond, S., Initial conditions and moment restrictions in dynamic panel data models, Journal of Econometrics, 1998, 87(1), P. 115-143. Doi: 10.1016/S0304-4076(98)00009-8

[11] Byoun, S., How and when do firms adjust their capital structures toward targets?, Journal of Finance, 2008, 63(6), P. 3069-3096. Doi: 10.1111/j.1540-6261.2008.01421.x

[12] Cassell, C.A., Huang, S.X., Manuel Sanchez, J., Stuart, M.D., Seeking safety: The relation between CEO inside debt holdings and the riskiness of firm investment and financial policies, Journal of Financial Economics, 2012, 103(3), P. 588-610. Doi: 10.1016/j.jfineco.2011.10.008

[13] Chang, Y.K., Chou, R.K., Huang, T.H., Corporate governance and the dynamics of capital structure: New evidence, Journal of Banking and Finance, 2014, 48(1), P. 374-385. Doi: 10.1016/j.jbankfin.2014.04.026

[14] Cohen, D.A., Dey, A., Lys, T.Z., Real and accrual-based earnings management in the pre-and post-Sarbanes-Oxley periods, The Accounting Review, 2008, 83(3), P. 757-787. https://www.jstor.org/stable/30244500

[15] Coles, J.L., Daniel, N.D., Naveen, L., Managerial incentives and risk-taking, Journal of Financial Economics, 2006, 79(2), P. 431-468. Doi: 10.1016/j.jfineco.2004.09.004

[16] Cook, D.O., Tang, T., Macroeconomic conditions and capital structure adjustment speed, Journal of Corporate Finance, 2010, 16(1), P. 73-87. Doi: 10.1016/j.jcorpfin.2009.02.003

[17] Cupertino, C.M., Martinez, A.L., da Costa Jr, N.C., Earnings manipulations by real activities management and investors’ perceptions, Research in International Business and Finance, 2015, 34(1), 309-323. Doi: 10.1016/j.ribaf.2015.02.015

[18] Dechow, P.M., Sloan, R.G., Sweeney, A.P., Detecting earnings management, The Accounting Review, 1995, 70(2), P. 193-225. https://www.jstor.org/stable/248303

[19] Devos, E., Rahman, S., Tsang, D., Debt covenants and the speed of capital structure adjustment, Journal of Corporate Finance, 2017, 45(1), P. 1-18. Doi: 10.1016/j.jcorpfin.2017.04.008

[20] Elsas, R., Florysiak, D., Heterogeneity in the speed of adjustment toward target leverage, International Review of Finance, 2011, 11(2), P. 181-211. Doi: 10.1111/j.1468-2443.2011.01130.x

[21] Faulkender, M., Flannery, M.J., Hankins, K.W., Smith, J.M., Cash flows and leverage adjustments,Journal of Financial Economics, 2012, 103(3), P. 632-646. Doi: 10.1016/j.jfineco.2011.10.013

[22] Flannery, M.J., Hankins, K.W., Estimating dynamic panel models in corporate finance, Journal of Corporate Finance, 2013, 19, P. 1-19. Doi: 10.1016/j.jcorpfin.2012.09.004

[23] Flannery, M.J., Rangan, K.P., Partial adjustment toward target capital structures, Journal of Financial Economics, 2006, 79(3), P. 469-506. Doi: 10.1016/j.jfineco.2005.03.004

[24] Frank, M.Z., Goyal, V.K., Capital structure decisions: Which factors are reliably important?, Financial Management, 2009, 38(1), P. 1-37. Doi: 10.1111/j.1755-053X.2009.01026.x

[25] Frank, M.Z., Shen, T., Common factors in corporate capital structure, 2013, Available at SSRN: http://dx.doi.org/10.2139/ssrn.2288767

[26] Graham, J.R., Harvey, C.R., The theory and practice of corporate finance: evidence from the field, Journal of Financial Economics, 2001, 60(2), P. 187-243. Doi: 10.1016/S0304-405X(01)00044-7

[27] Graham, J.R., Leary, M.T., A review of empirical capital structure research and directions the future, Annual Review of Financial Economics, 2011, 3, P. 309-345. Doi: 10.1146/annurev-financial-102710-144821

[28] Halling, M., Yu, J., Zechner, J., Leverage dynamics over the business cycle, Journal of Financial Economics, 2016, 122(1), P. 21-41. Doi: 10.1016/j.jfineco.2016.07.001

[29] Healy, P.M., Wahlen, J.M., A review of the earnings management literature and its implications for standard setting, Accounting Horizons, 1999, 13(4), P. 365-383. Doi: 10.2308/acch.1999.13.4.365

[30] Hirshleifer, D., and Thakor, A.V., Managerial conservatism, project choice, and debt, The Review of Financial Studies, 1992, 5(3), P. 437-470. Doi: 10.1093/rfs/5.3.437

[31] Holmström, B., Managerial incentive problems: A dynamic perspective, The Review of Economic Studies, 1999, 66(1), P. 169-182. Doi: 10.1111/1467-937X.00083

[32] Huang, R., Ritter, J.R., Testing theories of capital structure and estimating the speed of adjustment, The Journal of Financial and Quantitative Analysis, 2009, 44(2), P. 237-271. https://www.jstor.org/stable/40505924

[33] Hussain, H.I., Ali, M., Hassan, M.K., El-Khatib, R., Asymmetric capital structure speed of adjustment, equity mispricing and Shari’ah compliance of Malaysian firms, International Review of Economics Finance, 2020, In Press. Doi: 10.1016/j.iref.2020.10.017

[34] Jensen, M.C., Meckling, W.H., Theory of the firm: managerial behavior, agency costs and ownership structure, Journal of Financial Economics, 1976, 3(4), P. 305-360. Doi: 10.1016/0304-405X(76)90026-X

[35] Jiang, F., Jiang, Z., Huang, J., Kim, K.A., Nofsinger, J.R., Bank competition and leverage adjustments, Financial Management, 2017, 46(4), P. 995-1022. Doi: 10.1111/fima.12174

[36] Jones, J.J., Earnings management during import relief investigations, Journal of Accounting Research, 1991, 29(2), P. 193-228. Doi: 10.2307/2491047

[37] Kayhan, A., Titman, S., Firms’ histories and their capital structures, Journal of Financial Economics, 2007, 83(1), P. 1-32. Doi: 10.1016/j.jfineco.2005.10.007

[38] Kini, O., Williams, R., Tournament incentives, firm risk, and corporate policies, Journal of Financial Economics, 2012, 103(2), P. 350-376. Doi: 10.1016/j.jfineco.2011.09.005

[39] Korajczyk, R.A., Levy, A., Capital structure choice: macroeconomic conditions and financial constraints, Journal of Financial Economics, 2003, 68(1), P. 75-109. Doi: 10.1016/S0304-405X(2)00249-0

[40] Kothari, S., Leone, A., Wasley, C., Performance matched discretionary ‎accrual measures, Journal of Accounting and Economics, 2005, 39(1), P. 35ـ50.‎ Doi: 10.1016/j.jacceco.2004.11.002

[41] Lang, M., Lins, K.V., Maffett, M., Transparency, liquidity, and valuation: International evidence on when transparency matters most, Journal of Accounting Research, 2012, 50(3), P. 729-774. Doi: 10.1111/j.1475-679X.2012.00442.x

[42] Leary, M.T., Roberts, M.R., Do firms rebalance their capital structures?, The Journal of Finance, 2005, 60(6), P. 2575-2619. Doi: 10.1111/j.1540-6261.2005.00811.x

[43] Lemmon, M.L., Roberts, M.R., Zender, J.F., Back to the beginning: persistence and the cross-section of corporate capital structure, The Journal of Finance, 63(4), 2008, P. 1575-1608. Doi: 10.1111/j.1540-6261.2008.01369.x

[44] Lewellen, K., Financing decisions when managers are risk averse, Journal of Financial Economics, 2006, 82(3), P. 551-589. Doi: 10.1016/j.jfineco.2005.06.009

[45] Liao, L.K., Mukherjee, T., Wang, W., Corporate governance and capital structure dynamics: An empirical study, Journal of Financial Research, 2015, 38(2), P. 169-192. Doi: 10.1111/jfir.12057

[46] Lockhart, G.B., Credit lines and leverage adjustments, Journal of Corporate Finance, 2014, 25, P. 274-288. Doi: 10.1016/j.jcorpfin.2013.12.011

[47] Marchica, M.T., Mura, R., Financial flexibility, investment ability and firm value: evidence from firms with spare debt capacity, Financial Management, 2010, 39(4), P. 1339-1365. Doi: 10.1111/j.1755-053X.2010.01115.x

[48] Mashayekhi, B., Mashayekh, S., Development of accounting in Iran, The International Journal of Accounting, 2008, 43(1), P. 66-86. Doi: 10.1016/j.intacc.2008.01.004

[49] Miller, E.M., Risk, uncertainty, and divergence of opinion, The Journal of Finance, 1977, 32(4), P. 1151-1168. Doi: 10.2307/2326520

[50] Modigliani, F., Miller, M., The cost of capital, corporation finance and the theory of investment, American Economic Review, 1958, 49(4), P. 261-275. https://www.jstor.org/stable/1809766

[51] Myers, S.C., The capital structure puzzle, The Journal of Finance, 1984, 39(3), P. 574-592. Doi: 10.1111/j.1540-6261.1984.tb03646.x

[52] Neffati, A., Fred, I.B., Schalck, C., Earnings management, risk and corporate governance in US companies, Corporate Ownership and Control, 2011, 8(2), P. 170-176. Doi: 10.22495/cocv8i2c1p2

[53] Nguyen, C., Essays on corporate capital structure and cash holdings, The University of Manchester (United Kingdom), 2012.

[54] Öztekin, Ö., Capital structure decisions around the world: Which factors are reliably important?, Journal of Financial and Quantitative Analysis, 2015, 50(3), P. 301-323. Doi: 10.1017/S0022109014000660

[55] Öztekin, Ö., Flannery, M.J., Institutional determinants of capital structure adjustment speeds, Journal of Financial Economics, 2012, 103(1), P. 88-112. Doi: 10.1016/j.jfineco.2011.08.014

[56] Petacchi, R., Information asymmetry and capital structure: evidence from Regulation FD,Journal of Accounting and Economics, 2014, 59(2-3), P. 143-162. Doi: 10.1016/j.jacceco.2015.01.002

[57] Roychowdhury, S., Earnings management through real activities manipulation, Journal of Accounting and Economics, 2006, 42(3), P. 335–370. Doi: 10.1016/j.jacceco.2006.01.002

[58] Safari Gerayli, M., Comparability of financial reports and negative skewness of firm-specific monthly returns: evidence from Iranian firms, Advances in Mathematical Finance and Applications, 2021, 6(1), P. 153-165. Doi: 10.22034/amfa.2019.1864043.1196

[59] Serfling, M. A., CEO age and the riskiness of corporate policies, Journal of Corporate Finance, 2014, 25, P. 251-273. Doi: 10.1016/j.jcorpfin.2013.12.013

[60] Shivdasani, A., Stefanescu, I., How do pensions affects corporate capital structure decisions? The Review of Financial Studies, 2010, 23(3), P. 1287-1323. Doi: 10.1093/rfs/hhp094

[61] Strebulaev, I.A., Do tests of capital structure theory mean what they say?, The Journal of Finance, 2007, 62(4), P. 1747-1787. Doi: 10.1111/j.1540-6261.2007.01256.x

[62] Synn, C., Williams, C., Financial reporting quality and optimal capital structure, The 8^th CAPANA Annual Research Conference. www.capana.net /www/ conference 2015/synn Williams.pdf.

[63] Tone, K., Toloo, M., Izadikhah, M., A modified slacks-based measure of efficiency in data envelopment analysis, European Journal of Operational Research, 2020, 287 (2), P. 560-571, Doi: 10.1016/j.ejor.2020.04.019.

[64] Uysal, V.B., Deviation from the target capital structure and acquisition choices, Journal of Financial Economics, 2011, 102(3), P. 602-620. Doi: 10.1016/j.jfineco.2010.11.007

[65] Welch, I., Capital structure and stock returns, Journal of Political Economy, 2004, 112(1), P. 106-131. Doi: 10.1086/379933

[66] Yazdi, H., Mohammadian, M., Effect of profitability indices on the capital structure of listed companies in Tehran Stock Exchange, Advances in Mathematical Finance and Applications, 2017, 2(3), P.1-11, Doi: 10.22034/amfa.2017.533085

[67] Zalaghi, H., Godini, M., mansouri, K., The moderating role of firms characteristics on the relationship between working capital management and financial performance, Advances in Mathematical Finance and Applications, 2019, 4(1), P. 71-88. Doi: 10.22034/amfa.2019.581878.1158

[68] Zhou, Q., Keng Tan, K.J., Faff, R., Zhu, Y., Deviation from target capital structure cost of equity and speed of adjustment, Journal of Corporate Finance, 2016, 39(1), P. 99-120. Doi: 10.1016/j.jcorpfin.2016.06.002