Text-based multidimensional financial constraints and earnings management behaviour

Pradip Banerjee

Australian Journal of Management, 2025, vol. 50, issue 4, 1215-1266

Abstract: Using unidimensional accounting-based measures of financial constraints, prior literature finds that constrained firms engage in significantly higher accrual earnings management. We argue that a firm may face different degrees of financial constraints in the equity and debt market, which cannot be captured through unidimensional measures. We examine this association using a novel multi-dimensional text-based measure of equity and debt market constraints. Considering 46,149 firm-year observations (7096 unique firms) of US-listed firms over the period 1997–2015, we find the relationship between equity-constraint (debt-constraint) and earnings management is positive (negative), respectively. Furthermore, we show how investment growth opportunity moderates this relationship and how firm’s cash holdings, life cycle stage, and R&D intensity influence this relationship. Our results remain robust with, alternative specifications of earnings management and endogeneity concerns. JEL Classification: G31, G32, G34, M41

Keywords: Earnings management; equity-constraints; debt-constraints; text-based measures; FSD score (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:50:y:2025:i:4:p:1215-1266

DOI: 10.1177/03128962241270751

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