This study assesses the effects of leverage incentive on the three identified earnings management strategies of the Nigerian listed manufacturing firms. To achieve this, the study formulates three hypotheses and uses cross-sectional OLS to estimate accrual and real earnings management using
Dechow et'al (2002) and Roychowdhury (2006) models, respectively; as well as Panel OLS and panel logistic regressions to test for the impact of leverage on acrual earnings management, real earnings management and deferred tax earnings management. The hypotheses test models were
also subjected to fixed and random effect tests, in which for all the three models, the Hausman specification tests indicate that some of the firms' unobserved specific characteristics are constant over time but varies among panels, while some of these unobserved characteristics varies over time
but fixed within panels as such, we analysed the result we controlled for random effects. The study found that while significant positive relationship exists between leverage and accrual earnings management, the relationships are in negative direction for both real and deferred tax strategies.
Also, for the last two (real and deferred tax earnings management), the result is robust for two measures of leverage. However, the Andrew and Hosmer-Lameshow test for goodness-of-fit indicates that the models require additional data. As such, the study employed Quadratic-Hill-
Climbing test for omitted variables, using three additional variables (return on equity, financial burden and firm size). Despite the documented impact of these three additional variables on earnings management by previous studies, the tests show that these three additional variables are
jointly without any significant contribution to our models. We hence discard them and recommend for users to consider leverage in assessing the reliability of earnings and cash-flows. In light of the lack of fitness of our three models, we suggest for further studies on the impact of leverage on
earnings management strategies, while controlling for public/private debts and tightness of the debt covenants.
