Real Earnings Management Uncertainty and Corporate Credit Risk

47 Pages Posted: 13 Apr 2014

See all articles by Tsung-Kang Chen

Tsung-Kang Chen

National Chiao Tung University

Yi-Jie Tseng

Fu-Jen Catholic University

Yu-Ting Hsieh

National Cheng Kung University

Date Written: April 10, 2014

Abstract

This study examines the accounting information uncertainty effects on corporate credit risk from the perspective of real earnings management (RM) activities by investigating 9,565 American bond observations from year 2001 to 2008. The main results show that the volatilities of RM activities significantly and positively affect corporate bond yield spreads when well-known bond spread determinant variables are controlled. In addition, the results are robust to alternative model specifications, including the suspect firm analyses, another less ambiguous measure of abnormal cash flows from operations, and abnormal production costs analyses in manufacturing industry or with control of the input price variation. This research also finds that the positive effects of RM volatilities become weaker if a firm has a lower credit rating. Finally, our results remain hold with considering endogeneity issues and analyst characteristic variables and for another estimation period of RM volatilities.

Keywords: Real earnings management activities; Accounting information uncertainty; Credit risk; Bond yield spreads

JEL Classification: G12; G32; G41; M41

Suggested Citation

Chen, Tsung-Kang and Tseng, Yi-Jie and Hsieh, Yu-Ting, Real Earnings Management Uncertainty and Corporate Credit Risk (April 10, 2014). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2423395

Tsung-Kang Chen

National Chiao Tung University ( email )

No. 1001, Dasyue Rd., East Dist.,
Hsinchu City, 300
Taiwan

Yi-Jie Tseng (Contact Author)

Fu-Jen Catholic University ( email )

No. 510, Zhongzheng Rd., Xinzhuang Dist.
New Taipi City, 24205
Taiwan

Yu-Ting Hsieh

National Cheng Kung University ( email )

No.1, University Road
Tainan
Taiwan

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