Text-based multidimensional financial constraints and earnings management behaviour

Using unidimensional accounting-based measures of financial constraints, prior literature finds that constrained firms engage in significantly higher accrual earnings management. We argue that a firm may face different degrees of financial constraints in the equity and debt market, which cannot be captured through unidimensional measures. We examine this association using a novel multi-dimensional text-based measure of equity and debt market constraints. Considering 46,149 firm-year observations (7096 unique firms) of US-listed firms over the period 1997–2015, we find the relationship between equity-constraint (debt-constraint) and earnings management is positive (negative), respectively. Furthermore, we show how investment growth opportunity moderates this relationship and how firm’s cash holdings, life cycle stage, and R&D intensity influence this relationship. Our results remain robust with, alternative specifications of earnings management and endogeneity concerns. JEL Classification: G31, G32, G34, M41