Impact of Leverage on Earning Management Empirical Evidence from Manufacturing Sector of Pakistan

Abstract

The current study examines the impact of leverage on earning management in manufacturing sector of Pakistan. It selects the list of 159 non financial firms from Pakistan stock exchange for the time period from 2009 to 2015. The study has used Modified Jones Model 1995 as a proxy of earning management. Independent variable includes leverage along with three control variables i.e. growth, firm size and return on assets. The findings reveal that there is significant positive relationship between leverage and earning management activities while other variables of the firm i.e. return on assets and firm size were also found to be significant, whereas no significant relationship was found between growth and earning management activities. This study has also discussed the relationship between earning management and discretionary accruals.  Implications of the study for different stakeholders have also been discussed.

Keywords: Earning Management, Discretionary Accruals, Leverage, Non-Discretionary Accruals.