Firms' Use of Accounting Discretion to Influence Their Credit Ratings
Posted: 9 Jan 2013 Last revised: 14 Dec 2013
Date Written: January 8, 2013
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 then test whether such actions are successful in helping these firms move toward their expected credit ratings. We find evidence that firms that engage in income-increasing (-decreasing) earnings management activities and are below (above) expected ratings achieve future upgrades (downgrades). These 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
JEL Classification: G24, M41
Suggested Citation: Suggested Citation