Firms' Use of Accounting Discretion to Influence Their Credit Ratings

Posted: 9 Jan 2013 Last revised: 14 Dec 2013

See all articles by Walid Alissa

Walid Alissa

HEC Paris - Accounting and Management Control Department

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting

Kevin Koharki

Purdue University

Michael W. Penn

Florida State University - Department of Accounting

Date Written: January 8, 2013

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 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

Alissa, Walid and Bonsall, Samuel B. and Koharki, Kevin and Penn, Michael Wayne, Firms' Use of Accounting Discretion to Influence Their Credit Ratings (January 8, 2013). Journal of Accounting & Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2198025

Walid Alissa

HEC Paris - Accounting and Management Control Department ( email )

Accounting and Management Control Department
1, rue de la libération
Jouy-en-Josas, 78351
France

Samuel B. Bonsall (Contact Author)

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Kevin Koharki

Purdue University ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

Michael Wayne Penn

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States

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