The Associations among Free Cash Flow, Growth Opportunity, and Earnings Management

• Main Authors: Tzu-Yuan Ou, 歐姿緣
• Other Authors: Chin-Chen Yeh
• Format: Others
• Language: zh-TW
• Published: 2004
• Online Access: http://ndltd.ncl.edu.tw/handle/06624686674214708633

碩士 === 淡江大學 === 會計學系碩士班 === 94 === Free cash flow hypothesis points out the agent might cause the agency problems of over-investment and also supposes debt can solve this problem. Based on the debt, this study is extended to explore the debt covenant. The agency problems have generally existed in practice which revealed in previous study. But seldom studies explore the association between the free cash flow hypothesis and earnings management. Therefore, this study is based on free cash flow hypothesis and debt covenant hypothesis to examine the association between these two hypotheses and the discretionary accrual. The study puts free cash flow and growth opportunity into two groups separately, which spread out to four situations to discuss corporate managers’ earnings management phenomenon in different situations and explore the effect of the degree of debt on the managers’ earnings management behavior. Empirical results showed that the managers’ earnings management behavior relates significantly to two variables of free cash flow and growth opportunity in general. The managers exactly use discretionary accruals to manage earnings for self-interest in situation 2(high free cash flow and low growth opportunity), and the discretionary accruals are used more than other situations. The debt can generate the reduction of earnings manipulation caused by managers, so the free cash flow hypothesis is accepted. To other three situations, earnings management commonly exists and the rise of the degree of debt can not reduce managers’ manipulation, so the result accept the debt covenant hypothesis. As the result, this study distinguishing into four situations will help us understand the premises and background that free cash flow hypothesis and debt covenant hypothesis are accepted.