Role of Earning Management in Shaping Capital Structure Decision: Do Corporate Governance Matters in the Textile Industry of Pakistan

Role of Earning Management in Shaping Capital Structure Decision

Abstract

The manipulation of the financial statements through earning management practices provides misleading information to the shareholders. This study investigates the impact of earning management practices on the capital structure decisions of 69 textile companies in Pakistan listed on the stock exchange. This study further investigates the moderating role of corporate governance in this nexus using the System Generalized Method of Moments (GMM) estimation technique. The empirical evidence indicated a significant negative relationship between earning management practices and capital structure decisions among textile companies in Pakistan. The results further revealed that effective corporate governance mechanisms can mitigate the negative impact of earnings management practices on the capital structure decisions of Pakistan's textile companies. The controlling factor, firm age, significantly influences capital structure decisions, whereas firm size and operating cash flow have no significant impact. Lastly, the study's findings offer prudential recommendations for policymakers and think tanks to restrict earnings management practices through corporate governance to achieve an optimal capital structure.