Earning Management and Cost of Capital: Empirical Evidence of selected non-financial firms in Pakistan.

Abstract

 Earnings management hides the organisations underlying performance from shareholders and other stakeholders, making earnings a less reliable indicator of performance. The purpose of this study is to evaluate the influence of earning management on the cost of capital of 139 non-financial sector companies traded on the (PSX) from 2008 to 2019. Accruals are utilised as an earning management proxy. Discretionary (DAC) and non-discretionary (NDAC) accruals are used to calculate earning management. Data estimation technique in Stata using GMM assumptions, employing Arellano-Bond dynamic panel (GMM).  Empirical evidence revealed a significant and inverse association between DAC and COC, the higher the discretionary accruals, the lower the company COC. Furthermore, NDAC also influences the capital cost of manufacturing enterprises in Pakistan. Managers can exploit the NDAC to inflate the earnings.