Authors: Maria Kyriakou, Augustinos Dimitras

Title: The impact of leverage on earnings manipulation for companies with defensive and aggressive equity betas in the UK market

Abstract

The aim of this paper is to examine the impact of leverage on discretionary accruals (as a proxy of earnings manipulation) for different levels of equity betas for a sample of 71 companies in the UK market for six different non-financial sectors. We took into consideration non-financial companies from six sectors. The period spans from 2005 to 2018. Our results suggest that the impact of leverage on earnings manipulation is statistically significant. In addition, we find that the equity beta affects the earnings manipulation more in defensive than in aggressive equity beta companies, however with a lower persistence (e.g. 1 or 2 years). This means that the defensive equity beta companies have a lower impact on earnings manipulation, in comparison to aggressive equity beta companies, when the equity risk is concerned for investment purposes. Moreover, when we consider only the defensive equity beta sample of companies the leverage has a statistically significant impact on earnings manipulation. Besides, we cannot conclude the same for the sample of aggressive equity beta companies as we do not find a statistically significant relationship between leverage and earnings manipulation. Our results are important for shareholders, auditors and accountants.