Credit Rating Changes and Earnings Management

Asia-Pacific Journal of Financial Studies, 2013, Vol 42, pp 109-140

40 Pages Posted: 16 Jan 2013 Last revised: 17 Mar 2013

See all articles by Young Sang Kim

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Yura Kim

Kookmin University

Kyojik "Roy" Song

Sungkyunkwan University

Date Written: January 15, 2013

Abstract

We examine whether they engage in income-increasing accruals manipulation (AM) or real activities earnings management (RM) to affect the future rating changes when firm managers have private information about the upcoming credit rating change. Using the large sample of U.S. data over the period of 1990-2011, we find that firms with upcoming credit rating changes are likely to engage in real activities earnings management, whereas they tend to decrease discretionary accruals before credit rating changes. We also find a positive relation between real activities management and credit rating upgrades, but no relation with between real activities management and downgrades. The findings suggest that the firm’s management tries to influence the upcoming changes of credit ratings by actively engaging in real activities earnings management rather than accruals-based earnings management.

Keywords: Credit rating, Earnings management, Real activities management, Discretionary Accruals

JEL Classification: G30, G39

Suggested Citation

Kim, Young Sang and Kim, Yura and Song, Kyojik "Roy", Credit Rating Changes and Earnings Management (January 15, 2013). Asia-Pacific Journal of Financial Studies, 2013, Vol 42, pp 109-140 , Available at SSRN: https://ssrn.com/abstract=2201095 or http://dx.doi.org/10.2139/ssrn.2201095

Young Sang Kim (Contact Author)

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Economics and Finance
Highland Heights, KY 41099
United States
859-572-5160 (Phone)
859-572-6627 (Fax)

Yura Kim

Kookmin University ( email )

Chongnung-dong, Songbuk-gu
Seoul, 136-702
Korea, Republic of (South Korea)

Kyojik "Roy" Song

Sungkyunkwan University ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

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