Debt structure and earnings management: a non-linear analysis from an emerging economy

Abstract

The study investigates the relationship between debt ratio and earnings management based on the Panel Smooth Transition Regression (PSTR) model for the panel data of 432 non-financial Vietnamese listed firms over the period of 2006–2017. The estimated results properly show non-linear effects of debt ratio on earnings management in two regimes: (i) positive effect in low debt regime and (ii) negative effect in high debt regime. These results imply that debt ratio changes occur in earnings management before and after firms reach the optimal debt threshold point. Our research findings are robust to different debt ratio measures and methodologies.