Does Leverage Constrain Real and AEM Around IPO Corporate Event? Evidence from the Emerging Market

Sani Hussaini Kalgo, A. N. Bany-Ariffin, Hairul Nahar, Bolaji Tunde Matemilola

Research output: Contribution to journalArticle

Abstract

The article investigates whether Malaysian initial public offering (IPO) firms engage in real and accrual earnings management (AEM) and examines the impact of leverage on the earnings management’s discretionary behaviour of the firms for the period of 2003–2013. The Dechow, Sloan, and Sweeney (1995, The Accounting Review, 70[2], 193–225) cross-sectional modified Jones model was used to estimate discretionary accruals, while Roychowdhury’s (2006, Journal of Accounting and Economics, 42[3]), 335–370) cross-sectional models were used to investigate abnormal real activity discretionary behaviour. The results indicate Malaysian IPO firms engage in real and accrual discretionary behaviour. The graphical presentations of the earnings’ management proxies indicate higher real and AEM for high-leverage firms. Similarly, the multivariate analysis indicates a positive relationship between leverage and earnings management, which is in tandem with the agency cost of free cash flow theory and debt hypothesis. It is also consistent with the pecking-order theory of capital structure. This study suggests that regulatory agencies and standard setters should continue to improve quality of accounting reports in order to protect investors’ invested capital.

Original languageEnglish
JournalGlobal Business Review
DOIs
Publication statusPublished - Jan 1 2019

Fingerprint

Initial public offerings
Leverage
Earnings management
Emerging markets
Agency costs
Real activity
Discretionary accruals
Free cash flow
Multivariate analysis
Capital structure
Debt
Investors
Pecking order theory
Economics

Keywords

  • accrual earnings management
  • capital structure
  • emerging market
  • IPO
  • Real earnings management

ASJC Scopus subject areas

  • Business and International Management

Cite this

Does Leverage Constrain Real and AEM Around IPO Corporate Event? Evidence from the Emerging Market. / Kalgo, Sani Hussaini; Bany-Ariffin, A. N.; Nahar, Hairul; Matemilola, Bolaji Tunde.

In: Global Business Review, 01.01.2019.

Research output: Contribution to journalArticle

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