Earnings Manipulation and Adjustment Speed towards an Optimal Leverage

محورهای موضوعی : Financial Accounting

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

تاریخ دریافت : 1399/07/28 تاریخ پذیرش : 1399/09/29 تاریخ انتشار : 1400/04/10

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

چکیده مقاله :

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.

منابع و مأخذ:

[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