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School Research Seminar - The effect of financial leverage on real and accrual-based earnings management

16 December 2015

1:00 - 2:00pmFB 4.04/4.08 (Lunch from 12:30pm in the kitchen)

Speaker name & affiliation

Seraina C. Anagnostopoulou, Ph.D., CFA
Assistant Professor of Accounting, Athens University of Economics and Business, Department of Accounting and Finance and Visiting scholar at Queen Mary University, School of Business and Management

Seminar title

The effect of financial leverage on real and accrual-based earnings management
(co-authored with Dr Andrianos Tsekrekos, Athens University of Economics and Business)

Abstract

Past research has documented a substitution effect between real earnings management (RM) and accrual-based earnings management (AM), depending on relative costs. This study examines whether levels of (and changes in) financial leverage have an impact on this empirically documented trade-off. We testify that leverage levels and increases positively and significantly affect upward RM, with no significant effect on income-increasing AM, while our findings point towards a complementarity effect between unexpected levels of RM and AM for firms with very high leverage levels and changes. This is interpreted as an indication that high leverage could bring along strong outsider scrutiny, making it necessary for firms to use both forms of earnings management in order to achieve earnings targets.

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