THE MODERATING EFFECT OF CORPORATE GOVERNANCE ON THE RELATIONSHIP BETWEEN EARNINGS MANAGEMENT AND CAPITAL STRUCTURE
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Date
2023-05-25
Authors
Shams Al-Doha Mohammad Abu Alhassan
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Abstract
This study seeks to investigate the moderating role of corporate governance (CG) in the relationship between earnings management (EM) and debt level in capital structure of the firm (DCAPS). The annual reports of 38 firms from the manufacturing sector were analyzed for the period 2013–2020. By employing RStudio, the researcher included both fixed and random effect regressions in the analysis.
The overall results showed that EM improved debt ratio. Regarding the moderating role of CG, non-executive directors and female board members increased the high leverage implications of EM.
Palestinian manufacturing firms debt levels were significantly reduced by EM. The moderating role of CG states that larger boards and female directors increase the high-leverage impact of EM, while CEO duality reduces it. However, EM had an insignificant impact on debt in Jordanian manufacturing firms. The presence of female board members increased the firm's reliance on debt financing as a result of EM practices, while institutional investors mitigated the effect of EM on debt financing, decreasing debt reliance.
This study anticipated to contribute to capital structure literature by explaining the link between CG and EM and CAPS. Helping decision makers and investors assess the efficacy of existing CG reforms for strengthening CAPS management, managing EM practices, monitoring procedures, and creating the optimal capital structure. This study recommends that the board of directors and management should evaluate its tolerance while making decisions, especially regarding its financial structure. Capital-structure policy should be considered when making financial decisions. Second, managers should carefully design an optimal capital structure and protect their organization from risk. Since lenders depend on CG procedures, enterprises may need to maintain a specific level of CG practices to get more debt financing. This method improves monitoring, helping firms attract superior resources.
Study limitations are as follows: Few CG features that may directly affect financing decisions are not included in this study. The Palestinian sample employed in this study is three times smaller than the Jordanian sample, which may have affected the conclusions. Due to small sample size and time period, the findings cannot be applied to non-manufacturing samples.
Keywords: Capital structure, corporate governance, earnings management, Palestine exchange, Amman stock exchange