The Relationship between Suspicious Firms’ Earnings Management and Leverage: Evidence from Mongolia

This study explores how financial leverage shapes earnings management behaviors in Mongolian firms, focusing on loss evasion, Big Bath, and income-smoothing from 2013 to 2019. Using both accrual-based (AEM) and real earnings management (REM) measures, our findings reveal that high leverage drives loss evasion firms to manipulate earnings to meet targets and secure financing. Conversely, leverage acts as a constraint for Big Bath and income-smoothing firms, likely due to intensified creditor monitoring. The introduction of Mongolia’s E-Barimt digital invoicing system significantly curbs earnings manipulation among loss evasion firms, but tighter oversight appears to push some Big Bath and income-smoothing firms toward subtler real activity manipulation. These findings reveal how firm characteristics, regulatory reforms, and debt structure interact to shape managerial reporting in emerging markets. Supporting agency theory, the study offers insights for regulators to enhance financial governance and transparency through effective regulation and targeted debt management.