Abbas Aflatooni - Department of Accounting, Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamedan, Iran (Corresponding Author)
Mahdi Khazaei - Department of Accounting, Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamedan, Iran

This study investigates whether deviation from target leverage (leverage adjustment speed) in firms with small positive earnings (i.e., SPOS) is higher (slower) than that of other firms. We find evidence suggesting that managers of SPOS manipulate sales, production processes, and discretionary expenses to avoid reporting losses. Our results show that deviation from target leverage in SPOS is higher than that of other firms. In particular, we find that the negative (positive) deviation from target leverage in SPOS is lower (higher) than that of other firms. Furthermore, the results indicate that compared with the other firms, SPOS have slower leverage adjustment speed. After conducting robustness tests, our main conclusions remain valid.

Real activities manipulation, Capital Structure, leverage deviation, leverage adjustment speed, SPOS firms