Does Earnings Management Matter for Firm Leverage? An International Analysis

Abstract

This paper examines the relation between corporate information environment and capital structure decisions, and whether this association changes with cross-country institutional environments. Using earnings management as a measure of the corporate information environment, we find that firms with higher earnings management activities have greater firm leverage. We further document that the effect of earnings management on leverage is more pronounced in countries with weaker institutional environments. Overall, our study adds to the strand of research on imperfect factor markets and verifies the influence of information asymmetry on debt financing choices in a cross-country setting.

Keywords: Earnings management; Capital structure; Information asymmetry; Institutional environments

JEL Classification: G12; G15; G29; G32