Real Earnings Management Uncertainty and Corporate Credit Risk

Abstract

This study examines the accounting information uncertainty effects on corporate credit risk from the perspective of real earnings management (RM) activities by investigating 9565 American bond observations from year 2001 to 2008. The main results show that the volatilities of RM activities significantly and positively affect corporate bond yield spreads when well-known bond spread determinant variables are controlled. In addition, the results are robust to alternative model specifications, including the suspect firm analyses, another less ambiguous measure of abnormal cash flows from operations, and abnormal production cost analyses in manufacturing industry or with control of the input price variation. This research also finds that the positive effects of RM volatilities become weaker if a firm has a lower credit rating. Finally, our results remain hold with considering endogeneity issues and analyst characteristic variables and for another estimation period of RM volatilities.

The Effect of Earnings Management on Debt Maturity: An International Study

“…Consequently, by reducing firm value, real activities manipulation tends to decrease its credit quality and thereby impact negatively the debt maturity 6 . This result is consistent with Chen et al (2015) and Kim and Sohn (2013) who document that real earnings management is associated with uncertainty about future cash flows and higher credit risk.…”

“…We therefore extend our analysis to the link between financing conditions and real earnings management. According to Chen et al (2015), corporate credit risk is higher when real earnings management uncertainty is greater. They consider that real earnings management will influence firm's future cash flow uncertainty and asset value distributions, and therefore will increase credit risk.…”

“…Creditors can also use short-term debt to monitor borrowers that engage in real earnings management activities. Indeed, real earnings management will influence firm's uncertainty of future cash flows and asset value distributions, and therefore will increase credit risk (Chen et al 2015;Kim and Sohn 2013).…”

Asymmetric Cost Behavior and Investment in R&D: Evidence from China’s Manufacturing Listed Companies

“…Manager's expectation theory posits that if a manager is optimistic about future sales of products, the manager will retain idling assets to prevent resource allocation costs. By contrast, if the manager is pessimistic regarding future sales, the manager will cut back idling assets, thus resulting in anti-cost stickiness [10,21]. Opportunism theory states that under a series of opportunistic motivations, such as initial public offerings, seasoned equity offerings, earnings management, and imperialism, managers are motivated to alter resource allocation and cost structures for their own interest, thus causing cost or anti-cost stickiness through asymmetric cost and sales adjustment.…”

The Differential Role of R&D and SG&A for Earnings Management and Stock Price Manipulation*

“…5. 5. Other studies combining R&D and SG&A to examine real activities manipulation include those by Achleitner et al (2014) examining family firms; Franz et al (2014) examining debt covenant violation; Kim and Park (2014) examining auditors' client‐retention decisions; Brown et al (2015) examining credit ratings; Chan et al (2015) examining compensation clawbacks; Chen et al (2015) examining corporate credit risk; and Filip et al (2015) examining goodwill impairment losses. …”