Factors Affecting Earning Management : Evidence from Banking Sector of Pakistan

Abstract

The purpose of this study is to analyze the motivational factors behind the manipulation of the earnings. Earning management is defined as judgments of the managers while reporting the financial earnings. It is mostly used, to retain the financial position of the firm in their downfall. Firm size, profitability, financial leverage and effective tax rate are taken as the motivational factors behind earning manipulation. The study is done on the banking sector of Pakistan. It has used the convenient sample technique for the selection of 10 different banks. Impact of independent variables on the earning management is measured through regression and correlation analysis. The study found that whenever firm faces decline in their profit, the managers may utilize the future predicted earnings in the current year to retain its positive image. When the firm is financing its capital using debt, it will also lead the managers to misreport the bad figures. Firm size and tax rate found to be negative but insignificant in explaining the earning management.