Real earnings management and debt choice

Mostafa Monzur Hasan, Nurul Alam, Mohammad Riaz Uddin and Stewart Jones

Journal of International Financial Markets, Institutions and Money, 2024, vol. 97, issue C

Abstract: This study investigates whether real earnings management (RealEM) affects firms’ debt choice. We find that firms with higher RealEM rely more on bank debt than public debt as a source of financing. Our cross-sectional analysis reveals that the RealEM–debt choice association is more significant in the presence of poor corporate governance and heightened financing constraints. We also observe that the connection between RealEM and bank debt is more significant for suspect firms (i.e., firms with a genuine motive for opportunistic earnings management) than their non-suspect counterparts. Additionally, we find that RealEM increases the use of trade credit and short-term debt. Our findings are robust to endogeneity concerns and other issues. Overall, our findings suggest that the impact of information asymmetry issues arising from RealEM is less for bank than for public debtholders.

Keywords: Real earnings management; Information asymmetry; Bank debt (search for similar items in EconPapers)
JEL-codes: D82 G21 G32 O16 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:97:y:2024:i:c:s104244312400146x

DOI: 10.1016/j.intfin.2024.102080

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