Earnings Management, Financial Leverage, and Cash Flow Volatility: An Analysis by Industry

Nacasius U. Ujah¹, Jorge Brusa^2
(1. School of Business, Henderson State University at Arkadelphia Box 7801, 1100 Henderson Street, Arkadelphia, AR 71999, USA;
2. Sanchez School of Business, Texas A&M International University at Laredo, 5201 University, Laredo, TX 78041, USA)

Abstract: In this paper, we examine the effect of cash flow volatility and leverage on earnings management across industries. We examine 489 firms between the period of 1990 and 2009 and the results indicate that both financial leverage and cash flow volatility impact the degrees to which firms manage their earnings. Furthermore, we find that depending of which industry a firm belongs to, their degree and extent of managed earnings varies, where consumer staples and consumer cyclical are the most manipulated industries and transportation and utilities industries are the least manipulated.

Key words: earnings management; leverage; volatility; industry

JEL codes: G3, G30