Abstract

Management either for their informative or opportunistic purposes mask the true financial information of firms which is known as earnings manipulation practices. However, in turn such practices lead to a higher cost of capital. Therefore, in this study examined the effect of earnings manipulation on cost of capital in 144 listed sample firms of Pakistan Stock Exchange for the period of 2006-2016. Used panel data approaches for analysis and the diagnostic tests procedures of panel models selection suggests that fixed effect model is the suitable model. The result reports that firms that indulge in the activities of earnings manipulation their cost of capital are high because the manipulated information reduces the confidence of investors on fundamentals information of firms and ultimately they demand high rate of return. Moreover, control variables such as size, capital structure, firm performance, market risk and capital expenditure significantly affect the cost of capital and the results are consistent with the theoretical and empirical justifications. Hence, the study recommended for the policymakers to develop regulated policies to control the earnings manipulation.