The Impact of Leverage on Real Earnings Management: Evidences from Listed Manufacturing Companies in Colombo Stock Exchange

Abstract

The amount of funds a company has earned during a given period is generally reported based on appropriate and relevant accounting standards. Therefore, reported earnings helps to quantity the company's performance through earnings, nevertheless investors should consider not just earnings quantity, but also the quality of earnings, in evaluating a company's accounting earnings. The primary aim of this study is to examine the impact of Leverage on Real Earnings Management activities. The study was conducted using manufacturing companies listed in Colombo Stock Exchange with firm-quarter observations for the period of 2010 to 2015 using a panel data analysis. The results indicated that manufacturing companies are having abnormal cash flows and production cost in their operations and there is a significant positive impact of leverage on real earnings management in listed manufacturing companies in Colombo Stock Exchange, which in turn could effects the earnings quality of the companies.

Keywords

• Abnormal cash flows from operations, Abnormal production costs, Abnormal discretionary expenses, Real earnings management