The jinx of real earnings management: evidence from inefficient investments and debt maturity structure in Pakistan

Umair Saeed Bhutta, Aws AlHares, Yasir Shahab and Adeel Tariq

Journal of Accounting in Emerging Economies, 2021, vol. 12, issue 2, 405-432

Abstract: Purpose - This study aims to investigate two important research questions. First, this research examines the impact of real earnings management on investment inefficiency of the non-financial listed firms in Pakistan. Second, this research further explores the moderating role of short-term debt on the nexus between real earnings management and investment inefficiency. This study attempts to highlight an important research problem i.e. the jinx of real earnings management from the context of an emerging economy. Design/methodology/approach - This study employs the data from non-financial listed firms in Pakistan over the period from 2008 to 2018. The study uses panel data methodologies with firm and year fixed-effects to examine the proposed hypotheses. The results are robust to the use of sensitivity analysis, different estimation techniques and endogeneity issues (using two-stage least squares (2SLS) and generalized method of moments (GMM) techniques). Findings - The results of the research are twofold. First, consistent with the theoretical arguments, the findings reveal that real earnings management increases investment inefficiency and results in over-investments by the firms. Second, short-term debt attenuates the relationship between real earnings management and investment inefficiency. It implies that a higher level of short-term debt weakens the adverse effects of real earnings management on the investment efficiency of the firm. Originality/value - This study offers original findings on the issues pertaining to the quality of accounting and financial reporting in an emerging economy like Pakistan, where the implementation of regulations is weak in the corporate world and management frequently exploits shareholders' wealth for the short-term benefits.

Keywords: Investment inefficiency; Real earnings management; Short-term debt; Over-investment; Emerging economy (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jaeepp:jaee-03-2021-0079

DOI: 10.1108/JAEE-03-2021-0079

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