Effect of Capital Structure on Real versus Accrual Earnings Management Decisions and Future Performance

Abstract

This article investigates whether leverage affects the sequential nature of two earnings management methods and the future performance of levered firms using those methods on a sample of Turkish firms which has bank-oriented continental European financial structure. I find that both methods are alternatives for debtless firms while they are used simultaneously by indebted firms. In addition, real activities management is more informative for signaling future performance in levered firms while income-decreasing discretionary accruals are more informative for debtless firms.