Earnings Manipulation and Adjustment Speed towards an Optimal Leverage

• Main Authors: Abbas Aflatooni, Mahdi Khazaei, Zahra Nikbakht
• Format: Article
• Language: English
• Published: Islamic Azad University of Arak 2021-07-01
• Series: Advances in Mathematical Finance and Applications
• Subjects: real activities manipulation; accrual-based earnings manipulation; optimal leverage; speed of adjustment; leverage deviation
• Online Access: http://amfa.iau-arak.ac.ir/article_678872_c20014abac4c692f9b3581f099913830.pdf

This study examines whether the firms’ leverage adjustment speed is influenced by real and accrual-based earnings manipulation over the period 2006-2019. We find evidence suggesting that the leverage adjustment speed in firms with a higher level of real and accrual-based earnings manipulation is slower than that of other firms. Specifically, we show that under-levered (over-levered) firms with a higher level of earnings manipulation tend to adjust their actual leverage toward an optimal level, faster (slower) than that of other firms. These results are robust to different metrics for real and accrual-based earnings management, an alternative set of leverage determinants, alternative sample periods, and various estimation methods.