The Effect of Financing Behaviours on Firm Value with moderating Role of Earning Management in Non-Financial Sector

Abstract

The study investigates the relationship between financing behavior, earnings management, and firm value, focusing on a sample of non-financial firms over the period 2014-2023. A sample of stratified sampling techniques, 202 firms were selected from the population. In the fixed-effects model, the study explores the impact of debt usage (leverage) on firm value, considering earnings management as a moderating variable. The findings reveal a positive and significant relationship between financing behavior and firm value, which is consistent with the Trade-Off Theory, Modigliani & Miller Theorem, Pecking Order Theory, and Agency Theory. These theories suggest that strategically using debt can enhance firm value by exploiting tax shields, improving managerial discipline, and aligning shareholder-manager interests. However, the study also finds that the moderating effect of earnings management leads to a sign reversal in the relationship between financing behavior and firm value. This relationship shows a substitution effect. This result is explained through Agency Theory, Signaling Theory, Trade-Off Theory, and Pecking Order Theory, which highlight that earnings management can either amplify or distort the true impact of financing behavior on firm value. Earnings management, when used to signal financial stability or manage financial distress, can alter investors' perceptions and affect the financial health of firms. The analysis indicates that while earnings management can be beneficial in certain contexts, excessive manipulation may undermine the positive effects of debt on firm value. The study contributes to the literature by providing empirical evidence on how financing behavior, moderated by earnings management, affects firm value, with implications for corporate financial strategies and policy-making.