Skip to main content
×
×
Home

Earnings Management Surrounding Seasoned Bond Offerings: Do Managers Mislead Ratings Agencies and the Bond Market?

  • Gary L. Caton (a1), Chiraphol N. Chiyachantana (a2), Choong-Tze Chua (a3) and Jeremy Goh (a4)
Abstract

We study earnings management (EM) efforts surrounding seasoned bond offerings using discretionary current accruals. We find that issuers tend to inflate earnings performance prior to an offering. In order for EM efforts to effectively mislead ratings agencies and the bond market, they must lead to inflated bond ratings and decreased offering yields. Regression results indicate the opposite; aggressive EM efforts are associated with lower initial ratings and higher offering yields. We also find a statistically lower proportion of subsequent downgrades for firms with the most aggressive EM efforts, which is inconsistent with these firms’ inflated initial ratings. While some firms may attempt to mislead ratings agencies and market participants by window-dressing earnings, these efforts appear to be counterproductive.

Copyright
References
Hide All
Ali, A., and Zhang, W.. “Proximity to Broad Credit Rating Change and Earnings Management.” Working Paper, University of Texas at Dallas (2008).
Ashbaugh-Skaife, H.; Collins, D. W.; and LaFond, R.. “The Effects of Corporate Governance on Firms’ Credit Ratings.” Journal of Accounting and Economics, 42 (2006), 203243.
Ball, R., and Shivakumar, L.. “Earnings Quality at Initial Public Offerings.” Journal of Accounting and Economics, 45 (2008), 324349.
Barber, B. M., and Lyon, J. D.. “Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics.” Journal of Financial Economics, 41 (1996), 359399.
Becker, C. L.; DeFond, M. L.; Jiambalvo, J.; and Subramanyam, K. R.. “The Effect of Audit Quality on Earnings Management.” Contemporary Accounting Research, 15 (1998), 124.
Bergstresser, D., and Philippon, T.. “CEO Incentives and Earnings Management.” Journal of Financial Economics, 80 (2006), 511529.
Caouette, J. B.; Altman, E. I.; and Narayanan, P.. Managing Credit Risk: The Next Great Financial Challenge. New York, NY: John Wiley and Sons (1998).
DeFond, M. L., and Jiambalvo, J.. “Debt Covenant Violation and Manipulation of Accruals.” Journal of Accounting and Economics, 17 (1994), 145176.
Degeorge, F.; Patel, J.; and Zeckhauser, R.. “Earnings Management to Exceed Thresholds.” Journal of Business, 72 (1999), 133.
Demirtas, K. O.; Ghosh, A.; Rodgers, K. J.; and Sokobin, J.. “Initial Credit Ratings and Earnings Management.” Working Paper, City University of New York (2006).
DuCharme, L. L.; Malatesta, P. H.; and Sefcik, S. E.. “Earnings Management, Stock Issues, and Shareholder Lawsuits.” Journal of Financial Economics, 71 (2004), 2749.
Erickson, M., and Wang, S.-W.. “Earnings Management by Acquiring Firms in Stock for Stock Mergers.” Journal of Accounting and Economics, 27 (1999), 149176.
Jones, J. J. “Earnings Management during Import Relief Investigations.” Journal of Accounting Research, 29 (1991), 193228.
Kisgen, D. J. “Do Firms Target Credit Ratings or Leverage Levels?Journal of Financial and Quantitative Analysis, 44 (2009), 13231344.
Klein, A.Audit Committee, Board of Director Characteristics, and Earnings Management.” Journal of Accounting and Economics, 33 (2002), 375400.
Loughran, T., and Ritter, J. R.. “The Operating Performance of Firms Conducting Seasoned Equity Offerings.” Journal of Finance, 52 (1997), 18231850.
Rangan, S.Earnings Management and the Performance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998), 101122.
Standard & Poor’s. Corporate Ratings Criteria 2006, Standard & Poor’s Inc. (2005) http://www2.standardandpoors.com/spf/pdf/fixedincome/corporateratings_2006.pdf.
Stein, J. C. “Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics, 104 (1989), 655669.
Teoh, S. H.; Welch, I.; and Wong, T. J.. “Earnings Management and the Long-Run Market Performance of Initial Public Offerings.” Journal of Finance, 53 (1998a), 19351974.
Teoh, S. H.; Welch, I.; and Wong, T. J.. “Earnings Management and the Underperformance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998b), 6399.
White, H.A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817838.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed