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Short-term debt maturity, monitoring and accruals-based earnings management

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  • Fung, Simon Y.K.
  • Goodwin, John

Abstract

Most prior studies assume a positive relation between debt and earnings management, consistent with the financial distress theory. However, the empirical evidence for financial distress theory is mixed. Another stream of studies argues that lenders of short-term debt play a monitoring role over management, especially when the firm’s creditworthiness is not in doubt. To explore the implications of these arguments on managers’ earnings management incentives, we examine a sample of US firms over the period 2003–2006 and find that short-term debt is positively associated with accruals-based earnings management (measured by discretionary accruals), consistent with the financial distress theory. We also find that this relation is significantly weaker for firms that are of higher creditworthiness (i.e. investment grade firms), consistent with monitoring benefits outweighing financial distress reasons for managing earnings.

Suggested Citation

  • Fung, Simon Y.K. & Goodwin, John, 2013. "Short-term debt maturity, monitoring and accruals-based earnings management," Journal of Contemporary Accounting and Economics, Elsevier, vol. 9(1), pages 67-82.
  • Handle: RePEc:eee:jocaae:v:9:y:2013:i:1:p:67-82
    DOI: 10.1016/j.jcae.2013.01.002
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    References listed on IDEAS

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    3. Forough Heirany & Mahmoud Moeinadin & Manije Nazemizadeh, 2014. "The Role of Accrual Decomposition in Increasing the Information Value," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(1), pages 309-318, January.
    4. Karen Benson & Peter M Clarkson & Tom Smith & Irene Tutticci, 2015. "A review of accounting research in the Asia Pacific region," Australian Journal of Management, Australian School of Business, vol. 40(1), pages 36-88, February.

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