Accounting Manipulation and Weighted Average Cost of Capital: Detecting Earnings Management via Yoon and Miller (2006) Model: The Prospective of Pakistan

Abstract

This research has been carried out to investigate the potential correlation between accounting manipulation and the capital expenses of corporations listed on the Pakistan Stock Exchange (PSX). The study examines 80 non-financial companies listed on the PSX from 2008 to 2019. The researchers utilized the Dynamic Panel Generalized Method of Moments (GMM) for individual effects of indicators and analysis. To measure accounting manipulation, the Yoon & Miller (2006) model, Discretionary Accrual, is used as a proxy for earnings management. The researchers also incorporated four control variables: firm size, Return on Assets, Debt to Equity, and CEO Duality. The findings suggest an inverse relationship between discretionary accruals (DAC) and the Weighted Average Cost of Capital (WACC). That is to say, when DAC increases, WACC decreases. On the other hand, a positive association exists between non-discretionary accruals and WACC, indicating that managers may use non-discretionary accruals to inflate the company's earnings. The study highlights the need for greater regulatory attention to accounting manipulation, discretionary and non-discretionary accruals, and earnings management in non-financial listed companies in Pakistan and globally.