Impact of Real Earning Management Practices on Capital Structure and Dividend policy of Non-Financial Firms operating in Pakistan

Abstract

This research was conducted to study the phenomenon of earning management and tries to identify the impact of real earning management practices on capital structure and dividend policy of firms. The different ways in which real earning management practices can happen are through changes in research and development expenses, timing of fixed assets, discretionary expenses and changes in production costs. The study was based on firms operating in Pakistan and a sample size of 370 firms was taken and all firms were listed at Karachi Stock Exchange (KSE). The data was taken from Pakistan stock exchange website as it on yearly basis publishes balance sheet analysis data. Various statistical instruments were brought to use to find out the connection between real earning management practices with capital structure and dividend policy of firms. Stata software was used to measure the relationship between the independent and dependent variables of the study and Fixed Effect Model was applied on the panel data and it was concluded that there exists a positive and significant relationship of real earning management practices (RM proxy and CFO proxy) on capital structure (Debt to equity ratio) and dividend policy (Dividend payout ratio) of non-financial firms. Return on assets, return on equity, firm size and self-finance ratio were also part of the study and they were considered as controlled variables.