Abstract:

The aim of this paper is to examine the effect of increasing leverage on Earnings Management in firms listed on the Indonesia Stock Exchange. This study also aims to prove the Positive Accounting Theory about Debt Covenant Hypothesis. We used nonfinancial firms as our sample which have increasing leverage from 2007 to 2018 and obtained 571 firm-years observations. We observed Earnings Management into Accrual Earnings Management (which is measured by modified Jones model) and Real Earnings Management (which is measured by Roychowdury model). Leverage is measured using the Debt to Asset Ratio. Our result showed that leverage has a positive effect on Earnings Management, both through Accrual Earnings Management and Real Earnings Management, which means that if a firm is faced with high leverage, it tends to do high earnings management as well. This finding implies that managers can use the two forms of earnings management if their companies has high leverage and tend to increase over time.