Financial Leverage Levels and Firms’ Real Earnings Management

Abstract

This study is aimed to investigate the effect of different levels of financial leverage on real earnings management. In this study 125 firms in 2 different groups of high financial leverage and low financial leverage have been studied during 2004-2013. The real earnings management criteria include Abnormal operating cash flow, abnormal production costs and abnormal discretionary expenses. To investigate the effect of financial leverage on the real earnings management criteria, multivariate regression analysis using the panel data has been applied. The results show that in firms with high levels of financial leverage, the financial leverage has significant negative effect on each real earnings management criteria and also on sum of the real earnings management criteria. On the other hand, in firms with low levels of financial leverage, except when the real earnings management criteria is abnormal operating cash flow, financial leverage has significant negative effect on each real earnings management criteria and also on sum of the real earnings management criteria.

Keywords

• Financial Leverage
• Abnormal operational cash flow
• Real Earnings Management
• Abnormal discretionary expenses
• Abnormal Production Costs