Influence of Family-Owned Firms on the Relationship between Capital Structure and Earning Management

Abstract

Based on the agency, stewardship and pecking-order theories, the aim of this study is to explore the effect of firm’s capital structure on earning management as well as the moderating role of family-owned firms. The sample spams 250 manufacturing firms listed on Pakistan Stock Exchange over the period from 2012 to 2024. The discretionary accruals are employed as a proxy of earning management. The ordinary least square is used first to estimate the regression parameters that are then used to calculate the nondiscretionary accruals. Based on nondiscretionary accruals the discretionary accruals are then estimated. For further analysis this study employs fixed effect regression. The findings of this study reveal that firm’s capital structure have significantly positive impact on earning management and family-owned firms significantly weaken the relationship between capital structure and earning management. This study provides guidelines for the investing decisions of stakeholders as well as for the regulators to take protective measures to reduce the manipulation of financial statements. This study will also help regulators to make financial markets efficient.