The effect of debt maturity structure on earnings management strategies

What is it about?

The aim of this study is to investigate whether debt maturity matters for the choice of earnings management strategy (i.e., accruals earnings management and real earnings management). Based on a sample of 486 American listed firms extracted from fortune 1000 over the period 2006-2014, the results show that managers are more likely to manage earnings through real activities and reduce their use of accruals earnings management once short debt is increasing. This finding is consistent with the assertion that short-term debt induces heavy lenders’ scrutiny, making it difficult for managers to use accounting manipulations. They move hence to real earnings management due to a lower possibility of being discovered. Moreover, the results reveal a simultaneous use of accruals earnings management and real earnings management for firms with high long-term debt. This finding highlights that long-term debt does not produce regular lenders’ enforcement allowing managers to use both earnings management techniques to reach earnings targets.

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