Earnings Management, Capital Structure and the Role of Institutional Environments

47 Pages Posted: 29 Jan 2013

See all articles by Zhe An

Zhe An

Monash Business School; Financial Research Network (FIRN)

Donghui Li

UNSW Australia Business School, School of Banking and Finance

Jin Yu

Monash University -Department of Banking and Finance

Date Written: January 28, 2013

Abstract

This paper examines the effect of earnings management on financial leverage and how this relation is influenced by institutional environments by employing a large panel of 25,798 firms across 37 countries spanning the years 1989 to 2009. We find that firms with high earnings management activities are associated with high corporate leverage. More importantly, this positive relation is attenuated by strong institutional environments. Our results lend strong support to the notions that (1) both corporate debt and institutional environments can be served as external control mechanisms to alleviate the agency cost of free cash flow; and (2) it is less costly to rely on institutional environments than debt. Various robustness tests confirm our main conclusions.

Keywords: Earnings management, agency conflicts, empirical capital structure, institutional environments

JEL Classification: G32, G15

Suggested Citation

An, Zhe and Li, Donghui and Yu, Jin, Earnings Management, Capital Structure and the Role of Institutional Environments (January 28, 2013). FIRN Research Paper, Available at SSRN: https://ssrn.com/abstract=2207804 or http://dx.doi.org/10.2139/ssrn.2207804

Zhe An (Contact Author)

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Donghui Li

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Jin Yu

Monash University -Department of Banking and Finance ( email )

Melbourne
Australia
+61 3 99034590 (Phone)

HOME PAGE: http://sites.google.com/site/jinyufinecon/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
653
Abstract Views
2,656
rank
43,367
PlumX Metrics