The impact of real earnings management on corporate credit risk

Ahmed Hunjra (ahmedhunjra@gmail.com), Fazal Muhammad and Saber Sebai
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Fazal Muhammad: UR - Université de Rennes, CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique
Saber Sebai: ISCAE - Institut Supérieur de Comptabilité et d'Administration des Entreprises [Manouba] - UMA - Université de la Manouba [Tunisie]

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Abstract: Purpose Earnings management (EM) plays a vital role in risk management. This paper aims to investigate the impact of real earning management (REM) on credit risk. Design/methodology/approach This paper measures the credit risk by the expected default frequency of Kealhofer, McQuown and Vasicek model. This paper uses data from 2011 to 2020 of Pakistani manufacturing listed firms. This paper applies the fixed effect to analyze the results and generalized methods of moments to handle the heterogeneity issue. Findings This paper finds that the impact of REM on corporate credit risk is positive and significant and that of sales manipulation is negative and significant. This paper also reports similar outcomes of the robustness test using dynamic panel regression. Originality/value The findings of this study may help managers to modify the EM strategy to minimize corporate credit risk. Furthermore, the findings of this study are important for investors to enhance their understanding of firms' accounting information, REM activities and cash flow patterns. It further suggests the manager should consider credit risk as an important factor while practicing REM.

Keywords: Credit risk; GMM; Real earnings management; Risk management; KMV model (search for similar items in EconPapers)
Date: 2023
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Published in Journal of Financial Reporting and Accounting, 2023, 21 (5), pp.1171-1187. ⟨10.1108/JFRA-12-2021-0441⟩

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Journal Article: The impact of real earnings management on corporate credit risk (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03633556

DOI: 10.1108/JFRA-12-2021-0441

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