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Firms' use of accounting discretion to influence their credit ratings

Author

Listed:
  • Alissa, Walid
  • Bonsall, Samuel B.
  • Koharki, Kevin
  • Penn, Michael W.

Abstract

This paper examines whether firms that deviate from an empirically modeled (“expected”) credit rating engage in earnings management activities, as measured by abnormal accruals and real activities earnings management. We find evidence that firms use income-increasing (-decreasing) earnings management activities when they are below (above) their expected ratings. We then test whether such actions are successful in helping these firms move toward their expected credit ratings. The results suggest that firms below or above their expected credit ratings may be able to move toward expected ratings through the use of directional earnings management.

Suggested Citation

  • Alissa, Walid & Bonsall, Samuel B. & Koharki, Kevin & Penn, Michael W., 2013. "Firms' use of accounting discretion to influence their credit ratings," Journal of Accounting and Economics, Elsevier, vol. 55(2), pages 129-147.
    • Handle: RePEc:eee:jaecon:v:55:y:2013:i:2:p:129-147
    DOI: 10.1016/j.jacceco.2013.01.001
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    More about this item

    Keywords

    Credit rating agencies; Expected ratings; Earnings management; Accruals; Real activities;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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