IMPACT OF EARNING MANAGEMENT ON COST OF DEBT: EMPIRICAL ANALYSIS OF LISTED FIRMS ON PAKISTAN STOCK EXCHANGE

Abstract

In practices of earnings management shareholders and other stakeholders take keen interest because it manipulate the firms’ true performance and alternatively it reduces the accuracy of earnings as a performance indicator. The cost of debt for the firm reveals the degree of creditor trust in its loan-repayment capacity. In order to balance the risk of a large number of receivables that the company may not be able to recover and creditors impose a higher rate of return on debt. Therefore, this thesis investigated the effects of earnings management on the cost of debt for 40 non-financial listed firms during 2016 to 2021 with 240 firm-year observations. Panel data techniques are used for analysis. Moreover, firm size, leverage, and profitability are included in this study as control variables. The test results revealed a negative relationship between cost of debt and earnings management. The cost of debt will decrease if profit manipulation increases. The findings of this study are consistent with the study of Faiza and Alifiah (2017), such as they concluded that there is no significant association between cost of debt and earning management. Cost of debt and firm size have a positive association, suggesting a statistically significant relationship. Furthermore, there is a positive correlation between firm profitability and cost of debt, meaning that an increase in firm profitability is linked to an increase in the cost of debt. There is a negative correlation between leverage and cost of debt. In the basis of findings this is suggested that cost of debt is not related with earnings management particularlyy for businesses that have a less creditworthiness. In order to maintain the financial stability of the company the regulatory governing its financial system must be based on creditworthiness.