SPCEing It Up: The Credit Relevance of Non-Core Earnings Quality
47 Pages Posted: 29 Sep 2013 Last revised: 30 Sep 2013
Date Written: September 27, 2013
The recent financial crisis has highlighted the credit relevance of non-core earnings quality. We develop and test a total non-core accruals measure that decomposes the interrelations between core, pension and risk management sources of comprehensive earnings that are not covered in prior literature. Our evidence suggests that non-core earnings quality is related with the credit sensitivity of firms to earnings smoothing and increasing or decreasing earnings management. Empirical tests confirm our prediction that the strength of relation between earnings management and expected rating targets increases (decreases) with their lower (higher) exposure to risk management (pension) activities. The findings suggest that the propensity of firms to exercise managerial discretion over non-core earnings components in order to influence their expected credit ratings, which is costly for investors to monitor.
Keywords: non-core earnings, total non-core accruals, expected credit rating, pensions, risk management
JEL Classification: M41
Suggested Citation: Suggested Citation