The zero-leverage phenomenon : Are zero leverage firms more likely to engage in earnings management ?

Abstract

In this context, prior literature related EM practices with capital structure and particularly with leverage. Authors supporting the existence of this positive relationship state that companies that are close to violating debt covenants manipulate earnings to decrease the probability of default (Watts & Zimmerman, 1986). However, the relationship between earnings management (EM) and zero-leverage phenomenon (ZL) is found to be limited. Thus, the focus of the current study is to understand the connection between the two and to examine whether the level of earnings management of zero-leveraged firm changes depending on the COVID context based on a sample of 411 U.S public firms.