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.
AgrawalK. & ChatterjeeC. (2015). Earnings management and financial distress: Evidence from India. Global Business Review, 16(5), 140–154.
2.
AharonyJ.LinC-J. & LoebM. P. (1993). Initial public offerings, accounting choices, and earnings management. Contemporary Accounting Research, 10(1), 61–81.
3.
Ahmad-ZalukiN. A.CampbellK. & GoodacreA. (2011). Earnings management in Malaysian IPOs: The East Asian crisis, ownership control, and post-IPO performance. The International Journal of Accounting, 46(2), 111–137.
4.
AiniA.TakiahM. I.PourjalaliH. & TeruyaJ. (2006). Earnings management in Malaysia: A study on effects of accounting choices. Malaysian Accounting Review, 5(2), 185–207.
5.
BallR. & ShivakumarL. (2008). Earnings quality at initial public offerings. Journal of Accounting and Economics, 45(2–3), 324–349.
6.
Bany-AriffinA. N. (2010). Disentangling the driving force at Pyramidal firms capital structure: A new perspective. Studies in Economics and Finance, 27(3), 195–210.
7.
BeattyA.WeberJ. & YuJ. (2008). Conservatism and debt. Journal of Accounting and Economics, 45(2–3), 154–174.
8.
BeneishM. (1997). Detecting GAAP violation: Implications for assessing earnings management among firms with extreme financial performance. Journal of Accounting and Public Policy, 16(3), 309–382.
9.
BoothL.AivazianV.Demirguc-KuntA. & MaksimovicV. (2001). Capital structures in developing countries. The Journal of Finance, 56(1), 87–130.
10.
BradleyM. & JarrellG. A. (1984). On the existence of an optimal capital structure: Theory and evidence. Journal of Finance, 39(3), 857–878.
11.
BurgstahlerD.HailL. & LeuzC. (2006). The importance of reporting incentives: Earnings management in European private and public firms. Accounting Review, 81(5), 983–1016.
12.
ChungH. & KallapurS. (2003). Client importance, non audit services, and abnormal Accruals. The Accounting Review, 78(4), 931–955.
13.
ClaessensS.DjankovS. & LangL. H. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58(1–2), 81–112.
14.
CohenD. A. & ZarowinP. (2010). Accrual-based and real earnings management activities around seasoned equity offerings. Journal of Accounting and Economics, 50(1), 2–19.
15.
CohenD.DeyA. & LysT. (2008). Real and accrual-based earnings management in the pre- and post-Sarbanes-Oxley periods. The Accounting Review, 83(3), 757–787.
16.
DechowP. M. & SkinnerD. J. (2000). Earnings management: Reconciling the views of accounting academics, practitioners, and regulators. Accounting Horizons, 14(2), 235–250.
17.
DechowP. M.SloanR. G. & SweeneyA. P. (1995). Detecting earnings management. The Accounting Review, 70(2), 193–225.
18.
DeFondM. & JiambalvoJ. (1994). Debt covenant violation and manipulation of accruals. Journal of Accounting and Economics, 17(1–2), 145–176.
19.
DichevI. D. & SkinnerD. J. (2002). Large-sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 40(4), 1091–1123.
20.
DuCharmeL. L.MalatestaP. H. & SefcikS. E. (2004). Earnings management, stock issues, and shareholder lawsuits. Journal of Financial Economics, 71(1), 27–49.
21.
FamaE. F. & FrenchK. R. (1997). Industry costs of equity. Journal of Financial Economics, 43(2), 153–193.
22.
FieldsT. D.LysT. Z. & VincentL. (2001). Empirical research on accounting choice. Journal of Accounting and Economics, 31(1–3), 255–307.
23.
FungS. Y. K. & GoodwinJ. (2013). Short-term debt maturity, monitoring and accruals-based earnings management. Journal of Contemporary Accounting & Economics, 9(1), 67–82.
24.
GhoshA. & MoonD. (2010). Corporate debt financing and earnings quality. Journal of Business, Finance and Accounting, 10, 1–22.
25.
GrahamJ.HarveyR. & RajgopalS. (2005). The economic implications of corporate financial reporting. The Accounting Review, 80(4), 1101–1124.
26.
GuZ.LeeC. W. J. & RosettJ. G. (2005). What determines the variability of accounting accruals?Review of Quantitative Finance and Accounting, 24(3), 313–334.
27.
GunnyK. A. (2010). The relation between earnings management using real activities manipulation and future performance: Evidence from meeting earnings benchmarks. Contemporary Accounting Research, 27(3), 855–888.
28.
HealyP. M. & WahlenJ. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365–383.
29.
IturriagaF. J. L. & HoffmannP. S. (2005). Managers discretionary behaviour, earnings management and internal mechanisms of corporate governance: Empirical evidence from Chilean firms. Corporate Ownership & Control, 3(1), 17–29.
30.
JelinekK. (2007). The effect of leverage increases on earnings management. Journal of Business & Economic Studies, 13(2), 24–46.
31.
JensenM. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323–345.
32.
KalgoS. H.Bany-AriffinA. N.NaharH. S. & SitiZ. T. (2015). The impact of institutional investors on real and accrual earnings management around IPO: Evidence from Malaysia. Capital Market Review, 23, 65–83.
33.
NormanM. S.TakiahM. I. & MohidR. M. (2005). Earnings management and board characteristics: Evidence from Malaysia. Journal of Management, 24(4), 77–103.
34.
MatemilolaB. T.Bany-AriffinA. N. & Azman-SainiW. N. W. (2013). Impact of leverage and managerial skills on shareholders return. Procedia Economics and Finance, 7, 103–115.
35.
MohrmanM. B. (1996). The use of fixed GAAP provisions in debt contracts. Accounting Horizons, 10(3), 78–91.
36.
PurkayasthaS. (2013). Diversification strategy and firm performance: Evidence from Indian manufacturing firms. Global Business Review, 14(1), 1–23.
37.
RoosenboomP.Tjalling van derG. & GerardM. (2003). Earnings management and initial public offerings: Evidence from the Netherlands. The International Journal of Accounting, 38(3), 243–266.
38.
RoychowdhuryS. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42(3), 335–370.
39.
ShenC. H. & ChihH. L. (2007). Earnings management and corporate governance in Asia’s emerging markets. Corporate Governance: An International Review, 15(5), 999–1021.
40.
TabassumN.KaleemA. & NazirM. S. (2015). Real earnings management and future performance. Global Business Review, 16(1), 21–34.
41.
Wasimullah, ToorI. K. & AbbasZ. (2010). Can high leverage control the opportunistic behavior of managers: Case analysis of textile sector of Pakistan. International Research Journal of Finance and Economics, 7, 47–60.
42.
WattsR. L. & ZimmermanJ. L. (1990). Positive accounting theory: A ten year perspective. The Accounting Review, 65(1), 131–156.
43.
YongO. (2013). When do after market IPO prices stabilize? Evidence from Malaysian fixed price IPOs. International Review of Business Research Papers, 9, 77–90.
44.
ZangA. Y. (2012). Evidence on the trade-off between real activities manipulation and accrual-based earnings management. Accounting Review, 87(2), 675–703.
45.
ZhouJ. & ElderR. J. (2004). Audit quality and earnings management by seasoned equity offering firms. Asia-Pacific Journal of Accounting and Economics, 11(2), 95–120.
