Earnings Management, Financial Leverage, and Cash Flow Volatility : Do Economic Conditions Matter?

How vital are market conditions in determining the behavior of firms? In this paper we explore firm's impetus to manipulate earnings as it relates to their leverage and volatile cash flow positions in economic conditions. Borrowing a forerunner to proxy for pecking order and market-timing hypothesis, we find that firms are more susceptible and ascribe to market timing rationale. Furthermore, we explore the degree of suctions into managed earnings behavior from an industry standpoint and found that consumer staples and consumer cyclicals groups manages their earnings the most. The results are sturdy after addressing foreseeable bias in our initial analysis