Real Earnings Management and the Cost of New Corporate Bonds

Journal of Business Research, 2014, 67(4): 641-647.

27 Pages Posted: 19 Feb 2013 Last revised: 1 Apr 2014

See all articles by Wenxia Ge

Wenxia Ge

University of Ottawa

Jeong-Bon Kim

Simon Fraser University; City University of Hong Kong

Date Written: 2013

Abstract

We examine the association between real earnings management and the cost of new bond issues of U.S. corporations. We consider three types of real earnings management: sales manipulation, overproduction, and the abnormal reduction of discretionary expenditures. We find that overproduction impairs credit ratings and that sales manipulation and overproduction are associated with higher bond yield spreads. Overall, our results imply that credit rating agencies and bondholders perceive real earnings management as a credit risk-increasing factor and thus require high risk premiums.

Keywords: real earnings management, bond yield spread, credit rating, new bond issue

JEL Classification: G32, M41

Suggested Citation

Ge, Wenxia and Kim, Jeong-Bon, Real Earnings Management and the Cost of New Corporate Bonds (2013). Journal of Business Research, 2014, 67(4): 641-647., Available at SSRN: https://ssrn.com/abstract=2220799

Wenxia Ge (Contact Author)

University of Ottawa ( email )

55 Laurier Avenue East
Ottawa, Ontario K1N 6N5
Canada

Jeong-Bon Kim

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

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