Corporate debt and earnings management: evidence from Slovakia

Abstract

Several different models have been developed worldwide to detect manipulative financial reporting in enterprises. These earnings management practices help enterprises improve their financial performance or gain some advantages based on window dressing techniques. Moreover, there are several firm-specific factors and indicators that can influence the earnings management behavior of enterprises. The purpose of this paper is to test the relationship between corporate debt and earnings management in a sample of 15,716 Slovak firms over a 5-year period. The level of earnings management is measured by discretionary accruals using the Kasznik model, the debt of enterprises is quantified by several indicators (total indebtedness ratio, self-financing ratio, current and non-current indebtedness ratios, equity leverage ratio, and insolvency ratio). In this paper, a correlation analysis and an ANOVA method were applied to show if there is any statistically significant dependence between the level of discretionary accruals and corporate debt. The results indicate a positive relationship between the level of discretionary accruals and total indebtedness, non-current indebtedness, and insolvency ratios, while a negative relationship was revealed for self-financing and current indebtedness ratios.