Exposure to Credit Risk Spillovers and Corporate Earnings Management

This study examines the impact of exposure to credit risk spillovers on corporate earnings management within the Chinese market. We distinguish between two types of credit risk spillovers: negative credit risk externalities from peers, referred to as credit risk contagion (CRC), and potential benefits arising from competitors’ credit events, termed product market rivalry (PMR). Our empirical findings reveal that higher exposure to CRC effect is associated with less favorable external financing conditions, prompting firms to manage their earnings upward to convey positive signals to the market. Conversely, firms facing higher PMR effect exhibit increased competitiveness in capturing market shares, leading to reduced inclination toward earnings management. Moreover, we observe a preference among firms for manipulating real activities over accounting accruals in response to credit risk spillovers. The CRC effect outweighs PMR in influencing corporate earnings management practices. Additionally, heterogeneity in the impact of credit risk spillover exposures on earnings management is identified across various factors including state ownership and governance environments.