Creditor Protection and Enterprise Earnings Management —A Test Based on Bond Covenants

Xueying Zhang, Xiaoran Kong, Zehua Zhang and Zengcai Ding

Emerging Markets Finance and Trade, 2024, vol. 60, issue 14, 3201-3221

Abstract: Excessive earnings management can significantly reduce the quality of accounting information, consequently harming the interests of investors and creditors. In the Chinese market, research on earnings management focuses primarily on corporate governance and external environmental viewpoints, with limited literature addressing debt governance. This paper centers on exploring the protective impact of bond covenants, revealing their inhibitory effect on both accrual and real earnings management through two potential mechanisms (agency conflicts and risk-taking). Furthermore, this study conducts a heterogeneous analysis from various perspectives, identifying how bond covenants influence earnings management in different ways and underscoring the moderating role played by underwriters. The findings offer theoretical insights for the development of a high-quality information disclosure system.

Date: 2024
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DOI: 10.1080/1540496X.2024.2331008

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