Firms' use of accounting discretion to influence their credit ratings

Walid Alissa, Samuel B. Bonsall Iv, Kevin Koharki and Michael W. Penn Jr.
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Walid Alissa: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique
Samuel B. Bonsall Iv: Fisher College of Business - OSU - The Ohio State University [Columbus]
Kevin Koharki: Smeal College of Business - Penn State - Pennsylvania State University - Penn State System
Michael W. Penn Jr.: College of Business - Florida State University [Panama City]

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Abstract: This paper examines whether firms that deviate from an empirically modeled ("expected") credit rating engage in earnings management activities, as measured by abnormal accruals and real activities earnings management. We find evidence that firms use income-increasing (-decreasing) earnings management activities when they are below (above) their expected ratings. We then test whether such actions are successful in helping these firms move toward their expected credit ratings. The results suggest that firms below or above their expected credit ratings may be able to move toward expected ratings through the use of directional earnings management.

Keywords: Credit rating agencies; Expected ratings; Earnings management; Accruals; Real activities (search for similar items in EconPapers)
Date: 2013-05
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Citations: View citations in EconPapers (41)

Published in Journal of Accounting and Economics, 2013, 55 (2-3), pp.129-147. ⟨10.1016/j.jacceco.2013.01.001⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01069190

DOI: 10.1016/j.jacceco.2013.01.001

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