Does Corporate Governance Moderates the Impact of Earnings Management on Capital Structure: Evidence from Palestine and Amman Bourses

Abstract

Abstract Purpose – The purpose of this research is to investigate the moderating role of corporate governance on the relationship between earnings management and debt level in capital structure. Design/methodology/approach – This paper used a hypothesis-testing research approach to gather data from the annual reports of 13 industrial companies listed on Palestine Exchange and 25 Jordanian corporations listed on Amman Stock Exchange from 2013 to 2020. Descriptive and inferential statistics were employed, along with correlation analysis to evaluate linear relationships between variables. The fixed and random effect regressions were utilized to develop the research model. Findings – In the case of Palestinian manufacturing firms, the results revealed that Earnings Management (EM) had a significant negative impact on debt level. According to the moderating role of Corporate Governance (CG), larger boards and the existence of female members on the board of directors causes an increase in the high-leverage impact of EM, whereas CEO duality mitigates the high-leverage impact. However, in the case of Jordanian manufacturing firms, EM showed an insignificant impact on debt level. Regarding the moderating role of CG, it was proved that the presence of female members on the board of directors increased the firm’s reliance on debt financing as a result of EM practices, while institutional investors mitigate the effect of EM on debt financing, leading to a decrease in reliance on debt. Research limitations/implications – A few CG variables that may have a direct impact on financing decisions, such as management expertise, CEO compensation, CEO tenure and ownership concentration, are not included in this study. The absence of a unanimous CG index to measure the compliance of CG practices, as well as the existence of the reciprocal effect of capital structure on CG, is also a limiting factor. Additionally, due to the small sample size and time period, the findings cannot be generalized to other samples outside of the manufacturing sector or other time frames. Originality/value – The findings of this research are suitable for the regulators while formulating policies on the Corporate Governance and the Impact of Earnings Management on Capital Structure. These findings have guided the policymakers that they should enhance their focus on Palestine and Jordan companies to test Corporate Governance Moderates the Impact of Earnings Management on Capital Structure. This study is also helpful for the new researcher while investigating this area in the future.