Debt, diversification and earnings management

Gonzalo Rodríguez-Pérez, Stefan van Hemmen

Producció científica: Article en revista indexadaArticleAvaluat per experts

82 Cites (Scopus)


In this article we use panel-estimation techniques to calculate discretionary accruals (DAC) and to produce a better understanding of the nature of the relation between debt and earnings management. Consistent with the transparency hypothesis (which suggests that diversification increases the complexity of firms' activities and reduces their transparency to outsiders), we find that for less-diversified (more transparent) firms, debt reduces positive discretionary accruals, whereas in relatively more-diversified (less transparent) firms the impact of debt becomes positive. Our paper shows that marginal increases in debt provide the incentives for managers to manipulate earnings, and diversification provides the needed context for this accounting practice to be possible. We have also found that only in the sub-sample of aggressive firms, those that manage discretionary accruals with enough magnitude to increase income, do lenders exert their control. Some firms, however, take advantage of diversification to avoid this control. Our findings are robust to several earnings-management measures and methodologies.

Idioma originalAnglès
Pàgines (de-a)138-159
Nombre de pàgines22
RevistaJournal of Accounting and Public Policy
Estat de la publicacióPublicada - de març 2010
Publicat externament


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