The Impact of Capital Structure on Earnings Management and the Mediating Role of Corporate Governance in Palestinian Shareholding non-financial Companies.

Abstract

This study aimed mainly to determine the impact of capital structure on earnings management through the mediator corporate governance. Thus, the study followed the descriptive approach, and the quantitative method was applied to explain how the independent variables affect one another, in addition to examining the relationship among variables. This quantitative study uses primary data from companies' financial reports obtained from the Palestine Exchange Website. The researcher has extracted financial reports for 29 non-financial shareholding companies during the period (2018-2022) distributed in three sectors, 11 companies in the industrial sector, and 8 and 10 companies in service and investment respectively. Regarding data analysis, both descriptive and inferential statistical tools were used to examine the hypothesis and questions using the Stata program V. 18. According to the study, from 2018 to 2021, the mean value of earnings management in non-financial public shareholding businesses increased steadily and gradually; however, in 2022, it decreased. Furthermore, during the study period, the firm growth indicator's mean value was larger than the means of the other capital structure indicators, such as profitability and financial leverage. Moreover, the mean value of all capital structure indicators (financial leverage, firm growth, and profitability) has the highest value in the industry sector, followed by the service and investment sectors respectively. Additionally, capital structure has a statistically significant effect on earnings management in non-financial Palestinian firms that hold shares. Ultimately, the study demonstrated that the impact of capital structure (financial leverage, firm growth, profitability) on the earnings management of the Palestinian non-financial shareholding companies is not mitigated by board size, board independence, the independence of the audit committee, or board of directors’ meetings. Based on that, the study recommends that firms should focus on maintaining the financial leverage and profitability indicators, which play a role in the firm growth. Moreover, firms should always monitor the capital structure and earnings management indicators. In addition, firms should form their short-term and long-term goals, so they can decide effectively how to manage the earnings. Additionally, because board members own a portion of the companies in the industrial and investment sectors, these companies should permit the board of directors' responsibilities and independence to make decisions regarding capital structure and earnings management policies.