The Effect of Leverage and IFRS Convergence on Earnings Management Through Real Activities Manipulation in Asia

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Ratna Wardhani
Maulia Dewi Anggraenni


Manuscript type: Research Paper
Research aims: This study aims to examine the effect of leverage and
International Financial Reporting Standards (IFRS) convergence on
earnings management through real activities manipulation (RAM),
and the moderation role of the IFRS convergence in the relationship
between leverage and RAM. This study also explores whether the
links are different based on institutional contexts such as country
economic size, governance quality and IFRS adoption strategy.
Design/ Methodology/ Approach: This study employs panel
data and cross country analyses using 19,744 observations from
six sample countries in Asia that have already adopted the IFRS,
namely China, Hong Kong, Indonesia, Malaysia, the Philippines,
and Sri Lanka.
Research findings: This study finds that leverage has a significant
negative effect on RAM, and IFRS positively affects RAM. In the
period after IFRS convergence, the negative effect of leverage on
RAM increases. Interestingly, this study provides mixed empirical
evidence of the relationship between leverage and IFRS, and the
moderation effect of IFRS on RAM across different settings of
institutional contexts. This shows that institutional contexts do
matter. Theoretical contributions/ Originality: This study provides
empirical evidence on the effect of leverage and IFRS convergence
on RAM across countries in Asia.
Practitioner/ Policy implications: Regulators should make
provisions to protect creditors and increase monitoring to ensure
the quality of financial reporting.
Research limitations/ Implications: This study covers only six
countries in Asia. Future studies should cover other regions so
as to enlarge the coverage of the countries that have adopted or
fully converged to IFRS. This study uses several firm level control
variables. Future research may include other control variables such
as investor protection and types of legal system.


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