Impact of Debt Financing on Earnings Quality：Evidence from China

Due to the global financial crisis, many companies in China have faced enormous difficulties in raising capital. Since 2008, the stock market in China fluctuated fiercely and opportunities for IPO and equity refunding clearly slowed down. As equity funding became very difficult, debt financing became a more important source of raising capital. The purpose of this study is to examine how debt financing affects earnings quality. Using discretionary accruals as a proxy for earnings quality, we empirically analyze a relation between different types of debt financing and earnings quality. To mitigate multicollinearity problems, five types of debt financing variables were separately included as independent variables in the regression model. Empirical results indicate that the earnings quality is lower for firms with high ratios of bank financing, bond financing, and related party financing. However, the relation between client financing and earning quality is not significant.