Features of the Association between Debt and Earnings Quality for Small and Medium-Sized Entities
The main source of financing is bank loans for Portuguese small and medium-sized entities (SMEs), which implies several constraints to obtaining additional funds. Relying on the argument of Positive Accounting Theory (PAT) that accounting choices are not neutral and on Agency Theory that information...
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| Format: | Article |
| Language: | English |
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MDPI AG
2024-02-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/12/2/32 |
| _version_ | 1797297090289729536 |
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| author | José Sequeira Cláudia Pereira Luís Gomes Armindo Lima |
| author_facet | José Sequeira Cláudia Pereira Luís Gomes Armindo Lima |
| author_sort | José Sequeira |
| collection | DOAJ |
| description | The main source of financing is bank loans for Portuguese small and medium-sized entities (SMEs), which implies several constraints to obtaining additional funds. Relying on the argument of Positive Accounting Theory (PAT) that accounting choices are not neutral and on Agency Theory that information asymmetry prevails between insiders and outsiders, we analyzed the impacts of debt on earnings quality, focusing on its level, its increases, and its term of payment. We estimated econometric regressions using panel data with fixed effects over 2013–2019, using discretionary accruals as an inverse proxy of earnings quality. We found empirical evidence that the relationship between debt and earnings quality tends to vary in sign, as the quality of financial information deteriorates with debt, but as debt becomes high, firms tend to increase the quality of earnings. Furthermore, we found that short-term debt tends to decrease earnings quality more than long-term debt. This article aimed to contribute to the prior literature by collecting evidence that debt levels tend to be an incentive to increase earnings management and fill the gap by analyzing the influence of different debt features. This evidence is useful because earnings management may compromise both stakeholders’ confidence and the efficient allocation of capital. |
| first_indexed | 2024-03-07T22:15:13Z |
| format | Article |
| id | doaj.art-b055800815e9429c90e1c0d285e8bb9f |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-07T22:15:13Z |
| publishDate | 2024-02-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-b055800815e9429c90e1c0d285e8bb9f2024-02-23T15:33:20ZengMDPI AGRisks2227-90912024-02-011223210.3390/risks12020032Features of the Association between Debt and Earnings Quality for Small and Medium-Sized EntitiesJosé Sequeira0Cláudia Pereira1Luís Gomes2Armindo Lima3ISCAP, Polytechnic of Porto, 4465-004 Matosinhos, PortugalCEOS.PP, ISCAP, Polytechnic of Porto, 4465-004 Matosinhos, PortugalCEOS.PP, ISCAP, Polytechnic of Porto, 4465-004 Matosinhos, PortugalCEOS.PP, ISCAP, Polytechnic of Porto, 4465-004 Matosinhos, PortugalThe main source of financing is bank loans for Portuguese small and medium-sized entities (SMEs), which implies several constraints to obtaining additional funds. Relying on the argument of Positive Accounting Theory (PAT) that accounting choices are not neutral and on Agency Theory that information asymmetry prevails between insiders and outsiders, we analyzed the impacts of debt on earnings quality, focusing on its level, its increases, and its term of payment. We estimated econometric regressions using panel data with fixed effects over 2013–2019, using discretionary accruals as an inverse proxy of earnings quality. We found empirical evidence that the relationship between debt and earnings quality tends to vary in sign, as the quality of financial information deteriorates with debt, but as debt becomes high, firms tend to increase the quality of earnings. Furthermore, we found that short-term debt tends to decrease earnings quality more than long-term debt. This article aimed to contribute to the prior literature by collecting evidence that debt levels tend to be an incentive to increase earnings management and fill the gap by analyzing the influence of different debt features. This evidence is useful because earnings management may compromise both stakeholders’ confidence and the efficient allocation of capital.https://www.mdpi.com/2227-9091/12/2/32earnings managementdiscretionary accrualsSMEs’ debtnon-linear association |
| spellingShingle | José Sequeira Cláudia Pereira Luís Gomes Armindo Lima Features of the Association between Debt and Earnings Quality for Small and Medium-Sized Entities Risks earnings management discretionary accruals SMEs’ debt non-linear association |
| title | Features of the Association between Debt and Earnings Quality for Small and Medium-Sized Entities |
| title_full | Features of the Association between Debt and Earnings Quality for Small and Medium-Sized Entities |
| title_fullStr | Features of the Association between Debt and Earnings Quality for Small and Medium-Sized Entities |
| title_full_unstemmed | Features of the Association between Debt and Earnings Quality for Small and Medium-Sized Entities |
| title_short | Features of the Association between Debt and Earnings Quality for Small and Medium-Sized Entities |
| title_sort | features of the association between debt and earnings quality for small and medium sized entities |
| topic | earnings management discretionary accruals SMEs’ debt non-linear association |
| url | https://www.mdpi.com/2227-9091/12/2/32 |
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