Effects of borrowing costs, firm size, and characteristics of board of directors on earnings management types: a study at Borsa Istanbul^*

^*Accepted by Yue Ma upon recommendation by Junbo Wang.

Abstract

Using data for firms at Borsa Istanbul in Turkey, this study determines how borrowing costs, firm size, and board size and independency affect choice of earnings management (EM) type (efficient or opportunistic), in an attempt to expand the somewhat limited EM literature. The results of the ordinary least squares hypothesis testing show that the firms practice efficient EM, and that highly leveraged firms and those with a high proportion of independent non-executive board members use EM less than those with a low proportion, while large firms and those with large boards use EM more than those with small boards do.

Keywords:

• Earnings management
• positive accounting theory
• borrowing costs
• firm size
• corporate governance

Notes

^* Accepted by Yue Ma upon recommendation by Junbo Wang.

1. Formed in 1982, the CMB, whose board members are chosen by the Turkish finance ministry, is accountable for consumer protection, financial market stability and participant control in the stock market.

2. TA_it: Total accruals in year t for firm i (Net income (NI_t) – Cash flows from operation (CFO_t)); ΔREV_it: Revenues in year t less revenues in year t − 1 for firm i; PPE_it: Property, plant, and equipment in year t for firm i; ∆REC_it: Receivables in year t less receivables in year t − 1 for firm i; ∆CFO_it: Cash flows from operation in year t less t − 1 for firm i; ROA_it: Return on assets in year t for firm i.