Impacts of Earnings Management and Institutional-financial Development on Capital Structure Choice in Latin-American Markets

We analyzed the effects of accruals-based earnings management practices and institutional-financial qualities of countries on the financing policy of Latin American companies. We used panel data on a sample of 983 companies between 1995 and 2017. Our results indicate that positive discretionary accruals reduce leverage and increase debt maturity. These findings suggest that accounting manipulation activities favor managerial entrenchment and seek to avoid external supervision and liquidity risk. The institutional and financial development of countries promotes leverage and long-term debt issuances. However, its effects do not mitigate the impact of accounting manipulation activities on this policy. The IFRS adoption is an effective means of control that attenuates the effects of earnings management on capital structure. These results are relevant for investors and policymakers due to their implications for firms’ corporate governance and financial policy design.