The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe

Claudia Frisenna; Davide Rizzotti

doi:doi:10.11648/j.ijefm.20221006.24

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The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe

Claudia Frisenna, Davide Rizzotti

Published in International Journal of Economics, Finance and Management Sciences (Volume 10, Issue 6)

Received: 27 November 2022 Accepted: 20 December 2022 Published: 29 December 2022

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Abstract

This study aims at exploring the way in which managers of levered firms use accruals in the financial reporting process. Particularly, we examine the relationship between firm debt level and the signed value of abnormal accruals, and whether expected growth opportunities shape the above relation. The analysis is based on a large panel of European non-financial listed companies over the period 2005-2014, with 16,176 firm-year observations. We focus on the European Union, recognizing the importance of specific institutional features (such as the prominence of bank debt and the creditor protection rational) in determining reporting choices. Our findings show that levered firms are more likely to use income-decreasing accruals. This result is consistent with prior studies that emphasize the monitoring role of debt over aggressive accounting policies. However, we also find that, as investment opportunities increase, managers of levered firms shift to a more aggressive use of their discretion. This result shows that growth expectations play a critical role in shaping the relationship between firm leverage and managerial discretion. Overall, our findings suggest that debt plays a monitoring role over managerial discretion, restricting managers’ ability to boost earnings. However, the monitoring role of debt is weakened by the expected growth opportunities, as they constitute a stronger incentive to move earnings upward.

Published in	International Journal of Economics, Finance and Management Sciences (Volume 10, Issue 6)
DOI	10.11648/j.ijefm.20221006.24
Page(s)	416-426
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2022. Published by Science Publishing Group

Keywords

Abnormal Accruals, Leverage, Growth Opportunities, Europe, Earnings Management

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Claudia Frisenna, Davide Rizzotti. (2022). The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe. International Journal of Economics, Finance and Management Sciences, 10(6), 416-426. https://doi.org/10.11648/j.ijefm.20221006.24

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ACS Style

Claudia Frisenna; Davide Rizzotti. The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe. Int. J. Econ. Finance Manag. Sci. 2022, 10(6), 416-426. doi: 10.11648/j.ijefm.20221006.24

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AMA Style

Claudia Frisenna, Davide Rizzotti. The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe. Int J Econ Finance Manag Sci. 2022;10(6):416-426. doi: 10.11648/j.ijefm.20221006.24

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@article{10.11648/j.ijefm.20221006.24,
  author = {Claudia Frisenna and Davide Rizzotti},
  title = {The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {10},
  number = {6},
  pages = {416-426},
  doi = {10.11648/j.ijefm.20221006.24},
  url = {https://doi.org/10.11648/j.ijefm.20221006.24},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20221006.24},
  abstract = {This study aims at exploring the way in which managers of levered firms use accruals in the financial reporting process. Particularly, we examine the relationship between firm debt level and the signed value of abnormal accruals, and whether expected growth opportunities shape the above relation. The analysis is based on a large panel of European non-financial listed companies over the period 2005-2014, with 16,176 firm-year observations. We focus on the European Union, recognizing the importance of specific institutional features (such as the prominence of bank debt and the creditor protection rational) in determining reporting choices. Our findings show that levered firms are more likely to use income-decreasing accruals. This result is consistent with prior studies that emphasize the monitoring role of debt over aggressive accounting policies. However, we also find that, as investment opportunities increase, managers of levered firms shift to a more aggressive use of their discretion. This result shows that growth expectations play a critical role in shaping the relationship between firm leverage and managerial discretion. Overall, our findings suggest that debt plays a monitoring role over managerial discretion, restricting managers’ ability to boost earnings. However, the monitoring role of debt is weakened by the expected growth opportunities, as they constitute a stronger incentive to move earnings upward.},
 year = {2022}
}

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TY  - JOUR
T1  - The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe
AU  - Claudia Frisenna
AU  - Davide Rizzotti
Y1  - 2022/12/29
PY  - 2022
N1  - https://doi.org/10.11648/j.ijefm.20221006.24
DO  - 10.11648/j.ijefm.20221006.24
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 416
EP  - 426
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20221006.24
AB  - This study aims at exploring the way in which managers of levered firms use accruals in the financial reporting process. Particularly, we examine the relationship between firm debt level and the signed value of abnormal accruals, and whether expected growth opportunities shape the above relation. The analysis is based on a large panel of European non-financial listed companies over the period 2005-2014, with 16,176 firm-year observations. We focus on the European Union, recognizing the importance of specific institutional features (such as the prominence of bank debt and the creditor protection rational) in determining reporting choices. Our findings show that levered firms are more likely to use income-decreasing accruals. This result is consistent with prior studies that emphasize the monitoring role of debt over aggressive accounting policies. However, we also find that, as investment opportunities increase, managers of levered firms shift to a more aggressive use of their discretion. This result shows that growth expectations play a critical role in shaping the relationship between firm leverage and managerial discretion. Overall, our findings suggest that debt plays a monitoring role over managerial discretion, restricting managers’ ability to boost earnings. However, the monitoring role of debt is weakened by the expected growth opportunities, as they constitute a stronger incentive to move earnings upward.
VL  - 10
IS  - 6
ER  -

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Author Information

Claudia Frisenna

Department of Economics and Business, University of Catania, Catania, Italy
Davide Rizzotti

Department of Economics and Business, University of Catania, Catania, Italy

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APA Style

Claudia Frisenna, Davide Rizzotti. (2022). The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe. International Journal of Economics, Finance and Management Sciences, 10(6), 416-426. https://doi.org/10.11648/j.ijefm.20221006.24

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ACS Style

Claudia Frisenna; Davide Rizzotti. The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe. Int. J. Econ. Finance Manag. Sci. 2022, 10(6), 416-426. doi: 10.11648/j.ijefm.20221006.24

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AMA Style

Claudia Frisenna, Davide Rizzotti. The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe. Int J Econ Finance Manag Sci. 2022;10(6):416-426. doi: 10.11648/j.ijefm.20221006.24

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@article{10.11648/j.ijefm.20221006.24,
  author = {Claudia Frisenna and Davide Rizzotti},
  title = {The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe},
  journal = {International Journal of Economics, Finance and Management Sciences},
  volume = {10},
  number = {6},
  pages = {416-426},
  doi = {10.11648/j.ijefm.20221006.24},
  url = {https://doi.org/10.11648/j.ijefm.20221006.24},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijefm.20221006.24},
  abstract = {This study aims at exploring the way in which managers of levered firms use accruals in the financial reporting process. Particularly, we examine the relationship between firm debt level and the signed value of abnormal accruals, and whether expected growth opportunities shape the above relation. The analysis is based on a large panel of European non-financial listed companies over the period 2005-2014, with 16,176 firm-year observations. We focus on the European Union, recognizing the importance of specific institutional features (such as the prominence of bank debt and the creditor protection rational) in determining reporting choices. Our findings show that levered firms are more likely to use income-decreasing accruals. This result is consistent with prior studies that emphasize the monitoring role of debt over aggressive accounting policies. However, we also find that, as investment opportunities increase, managers of levered firms shift to a more aggressive use of their discretion. This result shows that growth expectations play a critical role in shaping the relationship between firm leverage and managerial discretion. Overall, our findings suggest that debt plays a monitoring role over managerial discretion, restricting managers’ ability to boost earnings. However, the monitoring role of debt is weakened by the expected growth opportunities, as they constitute a stronger incentive to move earnings upward.},
 year = {2022}
}

Copy | Download

TY  - JOUR
T1  - The Impact of Growth Opportunities on the Relationship Between Firm Debt and Abnormal Accruals - Evidence from Europe
AU  - Claudia Frisenna
AU  - Davide Rizzotti
Y1  - 2022/12/29
PY  - 2022
N1  - https://doi.org/10.11648/j.ijefm.20221006.24
DO  - 10.11648/j.ijefm.20221006.24
T2  - International Journal of Economics, Finance and Management Sciences
JF  - International Journal of Economics, Finance and Management Sciences
JO  - International Journal of Economics, Finance and Management Sciences
SP  - 416
EP  - 426
PB  - Science Publishing Group
SN  - 2326-9561
UR  - https://doi.org/10.11648/j.ijefm.20221006.24
AB  - This study aims at exploring the way in which managers of levered firms use accruals in the financial reporting process. Particularly, we examine the relationship between firm debt level and the signed value of abnormal accruals, and whether expected growth opportunities shape the above relation. The analysis is based on a large panel of European non-financial listed companies over the period 2005-2014, with 16,176 firm-year observations. We focus on the European Union, recognizing the importance of specific institutional features (such as the prominence of bank debt and the creditor protection rational) in determining reporting choices. Our findings show that levered firms are more likely to use income-decreasing accruals. This result is consistent with prior studies that emphasize the monitoring role of debt over aggressive accounting policies. However, we also find that, as investment opportunities increase, managers of levered firms shift to a more aggressive use of their discretion. This result shows that growth expectations play a critical role in shaping the relationship between firm leverage and managerial discretion. Overall, our findings suggest that debt plays a monitoring role over managerial discretion, restricting managers’ ability to boost earnings. However, the monitoring role of debt is weakened by the expected growth opportunities, as they constitute a stronger incentive to move earnings upward.
VL  - 10
IS  - 6
ER  -

Copy | Download