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The Interplay of Leverage, Financing Constraints and Real Earnings Management: A Panel Data Approach

Author

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  • Ammar Hussain

    (Department of Management Sciences, Government College University Faisalabad, Sahiwal Campus, Sahiwal 57000, Pakistan)

  • Minhas Akbar

    (Department of Management Sciences, COMSATS University Islamabad, Sahiwal Campus, Sahiwal 5700, Pakistan
    Department of Management, Faculty of Informatics and Management, University of Hradec Králové, Rokitanského 62, 500 03 Hradec Králové, Czech Republic)

  • Muhmmad Kaleem Khan

    (School of Management, Xi’an Jiaotong University, Xi’an 710061, China)

  • Marcela Sokolová

    (Department of Management, Faculty of Informatics and Management, University of Hradec Králové, Rokitanského 62, 500 03 Hradec Králové, Czech Republic)

  • Ahsan Akbar

    (Department of Management, Faculty of Informatics and Management, University of Hradec Králové, Rokitanského 62, 500 03 Hradec Králové, Czech Republic
    International Business School, Guangzhou City University of Technology, Guangzhou 510800, China)

Abstract

Organizations are formed to gain long-term benefits. However, sometimes myopic management for feigned value enhancement led to the early demise of the firm. Further, to the best of our knowledge empirical role of financing constraints has not yet been explored between the relationship of leverage and earnings management practices. Therefore, the present study aims to empirically examine the impact of leverage on Real Earnings Management (REM) practices and how financing constraints influence this association. Employs a panel dataset of 3250 non-financial Chinese listed firms for a time period spanning from 2009 to 2018. Leverage is categorized into short-term, long-term, and total leverage to check the individual effects of each leverage category on REM practices. The data were analyzed through panel data fixed-effects and random-effects techniques as an econometric approach. First, consistent with positive accounting theory, the impact of total leverage on REM is positive. Second, compared to the long-term leverage, short-term leverage has more pronounced effects on managers’ opportunistic behavior towards using REM. Third, the influence of total leverage is higher (lower) on REM practices in financially unconstrained (constrained) firms. Fourth, the influence of short-term leverage on REM practices compared to long-term leverage is also weak in the financially constrained firms. These findings imply that, to avoid the consequences of managerial myopia, investors should abstain to invest in the firms that use higher amount of short-term debt and are financially unconstrained. This study is the first research to examine the impact of different leverage categories on REM practices in an emerging market, i.e., China, where the legal and financial structure is much poor.

Suggested Citation

  • Ammar Hussain & Minhas Akbar & Muhmmad Kaleem Khan & Marcela Sokolová & Ahsan Akbar, 2022. "The Interplay of Leverage, Financing Constraints and Real Earnings Management: A Panel Data Approach," Risks, MDPI, vol. 10(6), pages 1-21, May.
    • Handle: RePEc:gam:jrisks:v:10:y:2022:i:6:p:110-:d:826363
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    References listed on IDEAS

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