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Earnings management prior to private debt issuance

Author

Listed:
  • Brandon Ater
  • Thomas Bowe Hansen

Abstract

Purpose - The purpose of this paper is to evaluate the extent to which firms manage earnings prior to private debt issuance. Design/methodology/approach - This is an empirical archival research paper using financial statement data and data related to private debt issuance. Findings - The results indicate that, on average, firms engage in income-increasing earnings management in the period prior to a new private debt issuance. In addition, it was found that this income-increasing earnings management is limited to firms which have engaged in income-increasing earnings management to a greater extent in prior years. Research limitations/implications - This paper provides insight into how managers’ balance competing incentives to use income-increasing earnings management to obtain more favorable lending terms, and to use income-decreasing earnings management to reduce the risk of a future debt covenant violation. The results indicate that firms’ incentive to use income-increasing earnings management dominates. However, reputational concerns significantly constrain firms’ earnings management decisions prior to private debt issuance. Originality/value - The paper fills a notable void in the literature by investigating firms’ earnings management activity prior to private lending agreements, and thereby provides new insights into both the relation between private debt and accounting quality, and the literature investigating the use of earnings management to avoid debt covenant violations.

Suggested Citation

  • Brandon Ater & Thomas Bowe Hansen, 2020. "Earnings management prior to private debt issuance," Accounting Research Journal, Emerald Group Publishing Limited, vol. 33(2), pages 269-285, February.
  • Handle: RePEc:eme:arjpps:arj-11-2018-0204
    DOI: 10.1108/ARJ-11-2018-0204
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    Citations

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    Cited by:

    1. Mubashar Tanveer & Mohsin Altaf & Zahid Ali Akbar & Uzma Nisar, 2022. "Influence of Advertising Intensity on Real Earnings Management: Evidence from Four Sectors of Pakistan," Journal of Economic Impact, Science Impact Publishers, vol. 4(1), pages 158-164.
    2. Roman Blazek & Pavol Durana & Katarina Valaskova, 2020. "Creative Accounting as an Apparatus for Reporting Profits in Agribusiness," JRFM, MDPI, vol. 13(11), pages 1-19, October.

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