The Influence of Earnings Volatility on the Association among Leverage and Real Earnings Management

Abstract

The association between leverage (LEV) and Real Earnings Management (REM), as well as how the volatility of earnings affects this relationship, are examined in this paper. The study sample comprises all non-financial companies listed on the Pakistan Stock Exchange from 2004 to 2018. Due to the endogeneity issue between the variables and the two-step system Generalized Method of Moment (SYS-GMM) dynamic panel estimator, business risk will be used as an interaction term in the hypothetical model to examine the association between LEV and REM. The model will be further elaborated using agency theory and positive accounting theory. After examining the connection between LEV and REM, the study will examine how business risk affects earnings volatility for the Pakistan Stock Exchange.