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The Association between Earnings Management and Capital Structure: An Empirical Study on Jordanian Firms Listed in Amman Stock Exchange

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  • Manar Al-Mohareb

    (Business School, University of Jordan, Jordan)

  • Mahmoud Alkhalaileh

    (Business School, University of Jordan, Jordan)

Abstract

The purpose of this study is to investigate the association between earnings management, measured by the absolute unexpected accruals and the firm's capital structure. The study sample consists of 44 manufacturing Jordanian firms listed in the Amman Stock Exchange during the 5 years (2008-2012), a total of 220 (firm-year) observations. The study provides evidence supporting the hypothesized association between capital structure and the absolute unexpected accruals. Consistent with most prior related studies' results, findings indicate a statistically positive association between earnings management and a firm's financial leverage which is used as a proxy of the firm capital structure. This result hold for one measure of financial leverage (long term-debt to equity ratio). However, when we use alternative leverage measure (total debt to assets ratio) as a capital structure proxy, the association between earnings management and leverage remains positive but statistically insignificant at the conventional level. Consistent with most related prior studies' findings, the empirical evidence also shows that capital structure is negatively associated with profitability return on equity and positively related to firm size. The regression coefficients on both variables are statistically significant at the conventional level. Also, both external financing and investment opportunities, are positively and significantly associated with capital structure.

Suggested Citation

  • Manar Al-Mohareb & Mahmoud Alkhalaileh, 2019. "The Association between Earnings Management and Capital Structure: An Empirical Study on Jordanian Firms Listed in Amman Stock Exchange," International Journal of Economics and Financial Issues, Econjournals, vol. 9(6), pages 106-112.
    • Handle: RePEc:eco:journ1:2019-06-13
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    References listed on IDEAS

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    Cited by:

    1. Yahia M. Al-Mughrabi, 2021. "The Impact of Financial Crisis on Earnings Management in Nonfinancial Listed Firms: Evidence from Jordan," International Journal of Business and Management, Canadian Center of Science and Education, vol. 15(5), pages 168-168, July.
    2. Johan, Sofia & Kayani, Umar Nawaz & Naeem, Muhammad Abubakr & Karim, Sitara, 2024. "How effective is the cash conversion cycle in improving firm performance? Evidence from BRICS," Emerging Markets Review, Elsevier, vol. 59(C).

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    More about this item

    Keywords

    Earnings Management; Capital Structure; D/E Ratio; Unexpected Accruals; Profitability; Size; Amman Stock Exchange; Jordanian Firms;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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