Do managers manipulate earnings to influence credit rating agencies’ decisions?

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.*Related content and download information correct at time of download. Design/methodology/approach -To measure earnings management activities, this paper computes accrual-based and real earnings management measures in the year or in the quarter immediately before the Watchlist resolutions for all negative and positive Watchlist firms. To examine the association between the levels of earnings management and Watchlist resolutions, a logit model is applied to the data obtained from a sample of Watchlist firms.Findings -Some evidence suggests that managers in Watchlist firms manage earnings in attempts to gain favorable Watchlist treatment. The findings are consistent with the Graham et al. 's (2005) survey evidence, which shows that one of the primary reasons for earnings management is to gain (or preserve) a desirable rating. In addition, CRAs appear to be misled by these attempts during the negative Watchlist process period.Research limitations/implications -The findings support SEC's (2011SEC's ( , 2013aSEC's ( , 2013b Originality/value -While many studies examine whether managers use discretionary accruals as a tool to manage earnings to obtain favorable ratings, those studies do not consider manipulation of real operating activities to manage earnings and CRA perceptions.

Earning Management Actions and Conditional Revenue as Managerial Efforts to Maintain Bond Rating

“…It is not to improve relations with creditors considering the already high rating, which is an average of 14a or scale A. This result is different from Zhao (2017) because of differences in the sample; namely, this study is dominated by companies with good ratings, while Zhao (2017) is the opposite.…”

“…Therefore, the researcher will analyze the effect of earnings management, company size, growth, and auditor size on bond ratings of non-financial companies on the Indonesia Stock Exchange. Based on the phenomenon of management actions manipulating earnings in influencing the credit rating agency decision by Zhao (2017) for the USA case after the 1988 capital market crash until the 2008 global financial crisis, this research tries to prove whether this phenomenon also applies to Indonesia by utilizing the results of the EM (Earning Management) calculation from Stuben (2010) and bond rating data from PEFINDO on 2012-2016 data. Data considerations that are not until 2018-2019 are considering the conditions of the trade war's effects between the USA and China, which will have a sufficient impact on the EM component of the related Stubben (2010).…”

“…Sari & Bandi (2010) and Zhao (2017) argued that one factor in bond valuation includes financial elements. Hence, companies tend to encourage managers to carry out earnings management concerning issuing bond ratings.…”

Elements of Credit Rating: A Hybrid Review and Future Research Agenda

“…Information provided to the CRAs by clients plays important role in determining credit scores. If manipulated information is provided to CRAs, credit rates so determined will not reflect the real creditworthiness of client (Zhao, 2017). Therefore, transparency in the credit rating is important factor for CRAs to earn trust of clients, investors and regulators.…”

Do firms manage earnings after a downgrade in their credit rating?

“…Firms with plus notch ratings, for example, are reported to smooth their earnings to reduce credit risk and, therefore, improve their credit rating and firms with credit rating below (above) their expectations employ income-increasing (-decreasing) earnings management to move towards their desired rating (Jung et al , 2013; Alissa et al , 2013). Even firms on negative credit watch are observed to manipulate their earnings upwards as an attempt to influence credit rating agency’s resolution (Liu et al , 2018 and Zhao, 2017). This empirical evidence suggests that such an opportunistic accounting behaviour related to a credit rating event is prevalent and may not be easily detected by credit rating agencies.…”