Leverage and Accrual-Based Earnings Management in U.S. Firms

Xu Qinglin

International Business School of Brandeis University, Sudbury, MA, USA

Abstract：

This study investigates how corporate leverage relates to accrual-based earnings management among U.S. publicly listed firms between 2010 and 2023. Prior research offers mixed predictions about how debt influences managerial reporting behavior. On the one hand, pressure from debt covenants may encourage managers to manipulate earnings upward to avoid violating contractual restrictions. On the other hand, creditors may monitor firms more closely when leverage is high, which could limit opportunistic financial reporting. Earnings management is proxied by total accruals scaled by total assets. This paper estimates ordinary least squares regressions while controlling for firm size. The empirical analysis indicates a significant negative association. These findings suggest that, during the sample period, the monitoring role of creditors appears to dominate the incentive for managers to manipulate earnings. Overall, the essay provides updated evidence on the association between capital structure and financial reporting behavior.

Key Words：

corporate leverage; accrual-based earnings management; total accruals; creditor monitoring; capital structure