The relationship between current debts and real earning management

The earnings management can be done by accruals or real activities or both of them. A few studies are conducted on the survey of the relationship between earnings management via real activities and current debts of companies. This study uses Abnormal Cash Flow from Operating activities (CFO), Abnormal Production Cost (PROD) and Abnormal Discretionary Expenses (DISEXP) model by Roychowdhury, 2006, as a proxy for REM. Using a sample of 648 firm-year observations for the period of 2006-2014, listed on Tehran Exchange Market, this study finds that a significant negative association between DEBTS and CFO. The finding reveals that DEBTS firms have lower levels of CFO. This supports the view that DEBTS limits REM activities, which in turn, could affect the quality of accounting earnings. The results of the study showed that real activities management to increase (reduce) the real earnings to achieve the forecast earnings leads to reduction (increase) of the abnormal cash flow from operations and decrease abnormal production expense compared to the normal conditions. In addition, there was no significant relation between abnormal discretionary expenses with the current debts.