Effects of capital structure and institutional–financial characteristics on earnings management practices

Abstract

PurposeThe purpose of this article is to analyze the effects of financing policy and countries' institutional–financial characteristics on earnings management (EM) practices in Latin American companies.Design/methodology/approachThe GMM estimator was used according to Arellano and Bover (1995) for panel data on a sample of 983 Latin American companies between 1995 and 2017.FindingsLeverage and short-term debt have a negative and nonlinear effect on EM practices. Nonlinearity suggests that firms with high levels of leverage and short-term debt carry out positive discretionary accruals. Countries' institutional and financial development reduces EM practices. Mandatory IFRS adoption also reduces these practices and mitigates the effects of the low institutional and financial development on EM.Originality/valueThese results reveal the relevance of companies' financing policy as a means of controlling EM practices. Results also suggest that policy effectiveness decreases with leverage and short-term debt. It is suggested that policymakers design financial policies aimed to promote institutional and financial development as a means of systematic control over EM activities, which also includes IFRS.