External financing and earnings management: Evidence from international data

Yuyang Zhang, Konari Uchida and Liping Dong

Research in International Business and Finance, 2020, vol. 54, issue C

Abstract: Corporate financing conditions in the external capital market are significantly affected by information asymmetry, while internal financing is not. Given that earnings information influences market perceptions regarding firms’ quality, firms relying on external financing should have incentives to manage earnings to improve their financing conditions. This study investigates the effect of corporate external financing behavior on earnings management. Using a sample comprising 75,790 observations of 12,874 firms in 43 countries, we find that accrual-based and real earnings management are positively associated with firms’ reliance on external financing. This positive relationship holds especially true for firms that rely on equity rather than debt financing. We argue that reliance on external financing (especially equity financing), which is subject to problems arising from information asymmetry, generates a motive for earnings management.

Keywords: External financing; Financing conditions; Information asymmetry; Earnings management; International (search for similar items in EconPapers)
JEL-codes: F39 G32 M41 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:54:y:2020:i:c:s0275531920300088

DOI: 10.1016/j.ribaf.2020.101275

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