Capital Structure Effect on the Practices of Earnings Management Phenomenon? The Evidence of Listed Firms in Abu Dhabi Securities Exchange

Abstract

The study objects for determining whether the listed firms in Abu Dhabi Securities Exchange exercise the phenomenon of earnings management in its financial reporting, and whether these practices are affected or driven by the capital structure of firms. To achieve the objectives of the study, a sample consisting of 29 listed firms at Abu Dhabi Securities Exchange (ADX) out of total 83 listed firms, had been selected using the simple random sampling method. Data covering 4-years was collected from the included firms in the sample, starting from 2012 till the end of 2015. The binomial distribution test is used to determine whether listed firms at ADX exercise the phenomenon of earnings management using the modified Jones 1995 model, whereas, the simple linear regression method is used to test whether the proportion of financial leverage in the capital structure of firms drives the practices of earnings management. The study shows that the firms exercise the phenomenon of earnings management, and the regression outputs show a significant positive effect of financial leverage on the practices of earnings management phenomenon.