PurposeThe aim of this study is to investigate whether debt maturity matters for the choice of earnings management strategy (i.e. accruals earnings management and real earnings management).Design/methodology/approachThe sample involves 486 American listed firms extracted from fortune 1,000 over the period 2006–2014. Panel data regression models are employed to empirically test the impact of short-term debt and long-term debt on manager's choice of earnings management form. The generalized least square technique is applied to estimate the parameters of the regression models.FindingsThe results show that managers are more likely to manage earnings through real activities and reduce their use of accruals earnings management once short debt is increasing because the latter induces heavy lender's scrutiny. The managers move hence to real earnings management due to a lower possibility of being discovered. Moreover, the results reveal a simultaneous use of accruals earnings management and real earnings management for firms with high long-term debt. This finding highlights that long-term debt does not produce regular lender's enforcement allowing managers to use both earnings management techniques to reach earnings targets.Research limitations/implicationsThis research has two limitations. Like many other studies, the measure of discretionary accruals is subject to measurement errors. Moreover, the sample exclusively involves large firms extracted from Fortune 1,000. Therefore, the attained results may be not available for small and medium firms.Practical implicationsThe findings have implications for both researchers and lenders. For researchers, the present work points out that the decision about the debt maturity structure is crucial for all managers because they establish their earnings management policy accordingly. For lenders, the findings imply that increasing scrutiny effectively constrains accounting manipulations but does not eliminate earnings management activities altogether. The managers move to another earnings management strategy (i.e. real earnings management). This evidence may support the lenders and the creditors in their decision-making processes.Originality/valueThis paper adds to the accounting literature by providing new and interesting evidence on the role of debt maturity on the trade-off between the earnings management tools. Prior studies provided mixed finding for the issue of earnings management in levered firms. The findings of this study should be viewed as a first step to understand the mixed results on this issue. While most papers focus on one earnings management form when they examine the earnings management in levered firms, the authors highlight the impact of debt on both accruals and real earnings management simultaneously.

The objective of this research is to investigate whether earnings management incentives influence the pricing of discretionary accruals. Specifically, we verify if growth opportunity, leverage, free cash flow, insider trading and financial distress are useful to investors to discriminate between opportunistic and informative earnings management.Using a sample of 486 American firms for the period 2002-2010, we find that discretionary accruals are positively related to stock returns. This relation is more intensive in high growth firms and high levered firms. Indeed, these firms use more informative earnings management to communicate future prospects and good financial situation to external investors. However, discretionary accruals are negatively priced by investors in distressed firms. These firms have a greater incentive to manage earnings opportunistically to hide any financial problem. Likewise, we detect a negative relationship between discretionary accruals and stock returns in firms with excessive free cash flow revealing the opportunistic perspective of earnings management. Finally, we demonstrate that investors award positive (negative) value to discretionary accruals in case of insider buying (selling).

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This research investigates the effect of the determinants of accounting discretion (beating last year’s earnings, overinvestment problems, growth options, debt, and financial risk) on the relationship between earnings management and stock returns. We use discretionary accruals as a proxy of earnings management.Based on a sample of 486 American firms for the period 2002-2010, our results show that discretionary accruals are positively priced by the market. This relation is even stronger when firms beat last year’s earnings, have higher growth options and increase their debt ratio. Indeed, firms’ accounting manipulations are used, in these circumstances, to convey private information about future prospects and signal good financial situation to external investors. However, discretionary accruals are negatively priced by investors in distressed firms and when overinvestment problems are intense. These firms have greater motivation to use opportunistic earnings management to camouflage the fall of firm value.