The Impact of Debt Financing On Earning Quality

Abstract

Financial statements are an indicator that is meant to reflect the reality of firm activities and provide a sound image for creditors to allocate loans and help users in decision making. One of the main factors that can be the cause of changing earnings quality is debt. This study aims to investigate the relationship between accruals quality as a proxy of earnings quality and debt financing specifically private debt. This study evaluates the above relationship for the listed companies in Korea stock exchange over time period 2003-2012. The basic model to evaluate the hypothesis is the ordinary least square regression which in turn takes into consideration four different types of definitions for accruals as a dependent variable and private debt along with a variety of control variables. The results of the study state that accruals quality and private debt have a positive relationship. As the private debt ratio increases, the quality of accruals will be improved. The same results are achieved even when the private debt considered as a percentage of total asset and also along with public debt as a dummy variable. The results show that private debt increases the earning quality in both large and small size while it did not prove for public debt. The results also are in consistence with studies that evaluate the link between accruals quality and management's opportunistic tendencies.