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Real earnings management and the cost of new corporate bonds

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  • Ge, Wenxia
  • Kim, Jeong-Bon

Abstract

We examine the association between real earnings management and the cost of new bond issues of U.S. corporations. We consider three types of real earnings management: sales manipulation, overproduction, and the abnormal reduction of discretionary expenditures. We find that overproduction impairs credit ratings and that sales manipulation and overproduction are associated with higher bond yield spreads. Overall, our results imply that credit rating agencies and bondholders perceive real earnings management as a credit risk-increasing factor and thus require high risk premiums.

Suggested Citation

  • Ge, Wenxia & Kim, Jeong-Bon, 2014. "Real earnings management and the cost of new corporate bonds," Journal of Business Research, Elsevier, vol. 67(4), pages 641-647.
  • Handle: RePEc:eee:jbrese:v:67:y:2014:i:4:p:641-647
    DOI: 10.1016/j.jbusres.2013.01.021
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    References listed on IDEAS

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    Cited by:

    1. Thomas Dilger & Sabine Graschitz, 2015. "Influencing Factors on Earnings Management, Empirical Evidence from Listed German and Austrian Companies," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 8(2), pages 69-86, October.
    2. Gaganis, Chrysovalantis & Hasan, Iftekhar & Pasiouras, Fotios, 2016. "Regulations, institutions and income smoothing by managing technical reserves: International evidence from the insurance industry," Omega, Elsevier, vol. 59(PA), pages 113-129.
    3. repec:kap:jbuset:v:150:y:2018:i:1:d:10.1007_s10551-016-3193-8 is not listed on IDEAS

    More about this item

    Keywords

    Real earnings management; Bond yield spread; Credit rating; New bond issue;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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