The impact of cash flow management versus accruals management on credit rating performance and usage

Eliza Xia Zhang ()
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Eliza Xia Zhang: University of Washington Tacoma

Review of Quantitative Finance and Accounting, 2020, vol. 54, issue 4, No 1, 1163-1193

Abstract: Abstract Corporate bond issuers attempt to influence bond ratings through their discretion over reported numbers, which could diminish credit rating quality. I find that cash flow management is negatively associated with rating quality, while accruals management is not. These results suggest that rating agencies fail to adjust for cash flow management, but they undo accruals management. The differential results for cash flow management versus accruals management could be due to the rating agencies’ more skeptical attitude towards accruals and the lower cost of adjusting accruals management. The relation between cash flow management and rating quality is weaker for issuers with high leverage and issuers with prior ratings around the investment-/speculative-grade cutoff. Overall, the evidence suggests that rating management through managerial discretion over reported numbers has a detrimental impact on rating quality, but only via the cash flow component. Fortunately, the bond market understands the implications of cash flow management on rating quality and relies less on ratings in response to cash flow management.

Keywords: Cash flow management; Accruals management; Corporate bond rating quality; Credit rating agencies; Bond yield spread (search for similar items in EconPapers)
JEL-codes: G18 G24 M41 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-019-00821-8

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