Debt Financing and Earnings Management: An Internal Capital Market Perspective

27 Pages Posted: 15 Nov 2013

See all articles by Hong‐Da Wang

Hong‐Da Wang

affiliation not provided to SSRN

Chan-Jane Lin

National Taiwan University - College of Management

Date Written: September/October 2013

Abstract

This paper investigates the role internal capital markets play in mitigating earnings management of group firms. We predict that the funding advantages of internal capital markets from business affiliates obscure solvency problems resulting from higher leverage for individual firms within a group, which in turn mitigates their incentives for earnings management. Using Taiwanese firms as a sample, we provide evidence that is consistent with such a prediction. In particular, we show that higher group profitability reduces its member firms’ sensitivity of earnings management to debt levels. Among business groups, earnings management in pyramidal groups is less sensitive to debt levels. We also find that the debt‐abnormal accrual curve becomes smoother as group profitability increases when considering the non‐monotonic relationship between firm leverage and earnings management.

Keywords: business groups, pyramidal ownership, debt financing, earnings management, internal capital markets

Suggested Citation

Wang, Hong‐Da and Lin, Chan-Jane, Debt Financing and Earnings Management: An Internal Capital Market Perspective (September/October 2013). Journal of Business Finance & Accounting, Vol. 40, Issue 7-8, pp. 842-868, 2013, Available at SSRN: https://ssrn.com/abstract=2354734 or http://dx.doi.org/10.1111/jbfa.12030

Hong‐Da Wang (Contact Author)

affiliation not provided to SSRN

No Address Available

Chan-Jane Lin

National Taiwan University - College of Management ( email )

Department of Accounting
1 Roosevelt Rd. Sec. 4
Taipei 106
Taiwan
886-2-3366-1115 (Phone)
886-2-2363-3640 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
1,120
PlumX Metrics