The impact of leverage on earnings management and the trade-off between discretionary accruals and real earnings management

Isaac Awuye and François Aubert
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Isaac Awuye: CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA [2017-2020] - Université Clermont Auvergne [2017-2020]
François Aubert: CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA [2017-2020] - Université Clermont Auvergne [2017-2020]

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Abstract: This research studies the impact of leverage on the earnings management levels of firms and investigates the role it plays in determining the choice of earnings management methods utilized by managers. This study is conducted within the context of European countries. Multiple panel regressions are run with leverage against various measures of earnings management. The results indicate that leverage curtails earnings management but this is only limited to discretionary accruals. Firms make a switch to real earnings management in cases of high leverage. The results indicate a positive impact of leverage on total earnings management and leverage moderates the choice between the two forms of earnings management. In the face of high leverage, managers make more use of real earnings management. This study broadens the scope of literature on leverage and earnings management by being the first study to investigate the impact of leverage on the total earnings management of firms and how leverage moderates the choice between the two forms of earnings management.

Keywords: Earnings management; leverage; discretionary accruals; real earnings management; trade-off (search for similar items in EconPapers)
Date: 2022-01-18
Note: View the original document on HAL open archive server: https://hal.science/hal-03824383
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Published in Journal of Accounting and Taxation, 2022, 14 (1), pp.89-101. ⟨10.5897/JAT2022.0519⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03824383

DOI: 10.5897/JAT2022.0519

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