Effect of Leverage on Real Earnings Management: Evidence from Korea

Ana Belen Tulcanaza-Prieto, Younghwan Lee and Jeong-Ho Koo
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Ana Belen Tulcanaza-Prieto: Department of Business Administration, Kumoh National Institute of Technology, Gumi 39177, Korea
Younghwan Lee: Department of Business Administration, Kumoh National Institute of Technology, Gumi 39177, Korea
Jeong-Ho Koo: Department of Business Administration, Kumoh National Institute of Technology, Gumi 39177, Korea

Sustainability, 2020, vol. 12, issue 6, 1-20

Abstract: This study examines how leverage affects real earnings management (REM) in non-financial firms listed on the Korea Composite Stock Price Index from 2010 to 2018 by employing total, short-term, and long-term debt ratios (i.e., leverage) as independent variables and four REM metrics as dependent variables. We find a significant positive relationship between leverage and REM in suspicious firms, whereas the effect of leverage is insignificant in non-suspicious firms. We also find that the positive relationship between both variables is stronger in the second half of the fiscal year, which shows the prevalence of the seasonality of REM, as managers collect high-frequency financial information during this period. These findings are consistent with those in the literature that managers increase firm leverage and REM activities to reduce their probability of being discovered, since financial statements in the interim quarters are not often audited. Our study complements the literature by introducing quarterly data to identify clearly REM activities and detect the strongest effect on the relationship between REM and leverage. Moreover, our results from the two-stage least square (2SLS) regression analysis are consistent with our previous findings.

Keywords: seasonality of real earnings management; leverage; abnormal cash flow from operations; abnormal SG&A expenses; abnormal production costs (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:12:y:2020:i:6:p:2232-:d:331851

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