Abstract
Management acts to maximize the wealth of shareholder and in addition, concentrated to minimize the cost of capital. However, sometimes management indulges in the manipulation practices of earnings information and such practices reduce the confidence of investors. Moreover, the cost of capital of firms is increasing. Hence, seeking this study investigated to empirically demonstrate that can earnings manipulation act as the determinant of cost of capital in capital market of Pakistan. For this purpose, the study selected 144 sample firms listed on the Pakistan Stock Exchange during 2007-2017. Along with performance matched model for measurement of earnings manipulation, costs of capital is calculated through weighted average cost of capital and also control variables. Moreover, the empirical findings are supported through agency, signaling and bankruptcy cost theories of capital structure. The empirical results demonstrate that when firms engage in earnings manipulation practices then their cost of capital will be high. Thus, the study found that earnings manipulation practices reduce the confidence of investors and they demand higher rate on their investment. Therefore, it is recommended to prepare the financial information according to the corporate governance code of Pakistan to control earnings manipulation practices of management, and get financing at lowest possible cost to increase the wealth of shareholders.